One of the buzzwords in the life insurance world is universal life. A lot of agents are pitching it as an alternative to a 401k.
… Is that a good idea?
Or perhaps you just need lifetime coverage and are wondering if UL is the best policy for the job.
We’ll uncover this and more in our universal life pros and cons guide, so you can make the most informed decision for you and your family.
What is Universal Life Insurance?
Universal vs. Whole Life:
Universal life insurance is also known as ‘Permanent Insurance’, as it offers lifetime lifetime protection, and is similar
to Whole Life Insurance, but to be clear there are indeed differences.
Unlike whole life insurance, universal life allows you to pay flexible premiums.
In addition, a side fund known as your cash value account is set up with your policy. Excess premiums, beyond the cost of the insurance, are placed here and earn a conservative rate of interest.
The benefit a cash value accumulation account is that as it grows, the cost of insurance can be pulled from there, meaning you don’t have to pay premiums if sufficient funds are availa
This feature is not guaranteed however. If your cash value account underperforms, you may be able.
asked to pay a higher premium to keep your coverage in force.
Universal vs. Term
The big difference between term life insurance and universal life insurance is that universal life is a permanent policy. Or in other words, its purpose is to provide coverage for your entire life.
In universal life (UL), you apply the same calculations to the premium as you do in term, but instead of taking an average over 10, 20 or 30 years, you pay the average price to insure yourself to age 100.
In addition, term has no cash value. If you cancel a term policy, nothing is returned to you.
The three main ingredients that make up Universal life.
1. Death Benefits
You basically have 2 options to choose from when deciding how you want death benefits to be paid to your beneficiary:
Type A Death Benefit or Level Death Benefit: You can choose a level death benefit, that starts off as one amount and stays level for the life of the policy, regardless of cash value. (known as “level death benefit” or “death benefit type A”).
Type B Death Benefit: The other option is a combination of a specific death benefit plus the cash value accumulation feature which builds over the life of the policy.
2. The Cash Accumulation Portion
A portion of your premiums is allocated by the insurance company into a interest crediting strategy of your choosing. One popular vehicle, called equity indexed universal life, allows you to participate in the gains of a major stock index, such as the S&P 500, with no risk of principal loss.
You are guaranteed a specific rate of return in many of these strategies, regardless of how well the market does. If the market performs better than the minimal guaranteed amount of investment, you may reap the rewards by benefitting from some portion of the gains, which may be capped at a certain percentage.
3. Flexible Premiums
The big difference between universal life insurance and a whole life policy, is that with universal life the premiums can be paid as the policyholder desires, as long as sufficient cash values are present to pay of the cost of insurance. With a whole life, you can’t change the premiums to suit your economic situation.
Guaranteed Universal Life Insurance to Age 100
One last note, be sure your plan is guaranteed universal life, meaning as long as you or your cash value pays the minimum premium, the death benefit is guaranteed.
What ever you do, don’t count on the market to rise or the insurance company to pay you a certain rate, please.
Every universal life illustration will have two columns, one for guaranteed values, and one for “assumed values”. I recommend you only look at the guaranteed column.
For a universal life insurance quote, simply fill out the instant form on the right side of the page and choose the option guaranteed life insurance “To Age 100 Level Guaranteed.”
The Pros of Universal Life Insurance
If your financial circumstances tend to fluctuate, you can choose to pay either higher or lower premiums. Even if your economic circumstances are rock solid, you can opt to pay a lower premium when the market is performing poorly and up the premium when the market is bullish to make more of your interest crediting strategy.
Interest Strategy Choices:
You aren’t forced to blindly accept where the cash accumulation portion goes, because the insurance company will give you several strategy options. You may pick an equity index strategy, a guaranteed one year term deposit, or a general interest account based on current rates.
You get coverage for your entire life, as long as you keep up with the premiums.
Cash Value Availability:
As you increase the value of the policy over time, you might wonder what happens if you get jammed up financially. Will you have to cancel the policy to get the cash value? No, you can keep the policy in force and your family protected at the same time. You can borrow or even withdraw the cash value you have built up to date and retain not only the unused portion of the cash value but the availability of death benefits.
The Flexibility of the Universal Life Cash Value Feature:
Now let’s cover the cash value aspect of universal life insurance in more detail, because its flexibility is a big advantage. Say your minimum premium is $50 per month. You can send in $50 every month for your whole life and you’ll have your coverage, or you might decide to send in $100. The first $50 goes to paying your insurance costs: cost of insurance, premium fee, administration fee, etc. The other $50 bucks goes into your cash value account.
The cash value account works similarly to a Roth IRA. The idea is to stuff it full of cash and let it accumulate in the early years, so you can pay lower premiums or no premiums in the later policy years. If you’re 20, you might be thinking, “Look, I don’t want to be paying these premiums when I’m 80 years old.”
You don’t have to. What you do is send in additional premiums which earn interest and grow tax deferred in your cash value account. Eventually, you’ll have enough cash in your policy, that at some point you can stop making premium payments. The insurance company will then take the cost of insurance out of your cash value, and as long as there are sufficient funds, you no longer have to make premium payments.
What some people do is take overfunding to the extreme and send in 4-5 times the minimum premium. They do this because of the growth potential and tax advantages of life insurance contracts.
Both the cash value investment portion and the death benefits are tax deferred which means the IRS will not bother you when there is a payout. Just remember, if you borrow against the cash accumulation account you have to take the funds as a loan to enjoy this benefit, which means you will incur interest.
Premiums Are Covered:
If you are financially strapped and can’t make the premium, the insurance company will pay the amount of the premium from the accumulated cash value which may be very convenient.
Cons of Universal Life Insurance
This type of life insurance policy costs a lot more than other policies in terms of premiums paid and fees, especially when you compare it to Term Life Insurance for example. Universal life is usually 3 to 4 times the cost of term.
Even if you need permanent coverage, you can typically save about 20% by purchasing guaranteed universal life (which is like term to age 100) instead of straight universal life.
Be cautious when choosing your policy, because some offer 2 options. The first is Level Cost of Insurance or “LCOI”, which means the amount of mortality payment never changes. The second option is Yearly Renewable Term, which means the mortality portion of the premium will change over time.
It’s relatively cheap if you buy the policy when you’re younger, but gets progressively more expensive over time. If your mortality expenses increase annually, you’ll want to be sure to request illustrations frequently to be sure your policy benefits are in good standing. Alternatively, you may want to add a no lapse guarantee rider to your policy for whatever length you MUST have the policy in force, to ensure the premiums and the death benefit stays level for that period.
Repayment of Borrowed Cash Value:
Although borrowing against the accumulated cash value is convenient, you have to pay it back. What’s even more inconvenient, the insurance company will charge you interest. Beware that borrowing money on some universal policies may also reduce your death benefit.
You Have to Monitor Your Cash Values:
This is not the type of policy you want to just stick in the drawer and simply pay the premiums as they come due. You need to keep track of how your cash value account is doing, and frequently request in force illustrations. If you’re a person that is not too savvy about investments, this may not be the best policy for you.
Interest Rates are Conservative:
If you’re hoping to stuff premiums into your policy and treat universal life as an investment to make a lot of money, you may not get the yields you’re looking for, as interest rates are relatively conservative.
Universal Life Insurance Quotes to 95
Universal Life Insurance to 95 Years Old
Do you Really Need Lifetime Coverage?
Pssst. Come close.
I’m going to tell you something most agents who live off of commissions won’t.
… you probably don’t need permanent life insurance.
In my experience, most people I work with in their 40’s or 50’s are planning for retirement by paying down their debts, and investing for the future.
If you’re considering UL, ask yourself why you might still need life insurance over 70 or 80? Will you still need life insurance then? I sure hope not.
There are a couple instances when lifetime coverage is appropriate ,such as for estate planning or charitable giving, and in those cases, sure, it makes sense to buy some guaranteed universal life.
Other than that, most people can get by on term.
However, if you do want lifetime coverage, you can get a custom tailored universal life quote by calling 877-443-9467 or using our quote form and selecting the lifetime option. We have several carriers like North American, American General, Protective, and Transamerica, that offer various forms of universal life. We prefer the guaranteed form, which offers a guarantee your policy will not lapse as long as you pay your premiums. See our North American Company Review for details about their plan.
If you’re looking for universal life insurance, many companies, as seen in our Select Quote Review, specialize term, and may not offer every form of UL.
Universal Life as an Investment
Now that I’m in my tenth year selling life insurance, I’ve had my fair share of sales where a client told me they were already maxing out their 401k and IRA, and were looking for another place to invest their money.
Due to some tax advantages of cash value life insurance, universal life has historically been one resting place for funds looking for a home.
In other words, maybe you’re not interested in lifetime insurance protection, but are seeking life insurance as an investment.
I’m very familiar with this world and personally own a UL for its cash value build-up. Here are my thoughts:
How Universal Life as an Investment Works
When you pay your annual premium, a portion of that goes to the costs of the policy. Anything left over will be directed into whatever interest crediting strategy you elect. Most companies have guaranteed interest strategies, non guaranteed strategies set by the company, or non guaranteed strategies whose performance is somehow tied to an equity index, such as the S&P 500.
The benefit to universal life over whole life is flexibility.
Using the Cash Value for Other Purposes
Most financial planners agree that life insurance should not be looked at as an investment. However, thousands of individuals have used life insurance over the years to fund college planning needs, retirement planning, and even as makeshift pension plans.
I used to read a lot about using life insurance for cash accumulation, and to be honest, now that I’ve sold some of these and seen the performance over the years, I don’t have strong opinions either way on using universal life as an investment.
It sounds good, in theory, with tax advantages and some of the creative interest crediting strategies available (especially the indexing strategies)…but the performance of the policies I’ve written hasn’t been great.
Let’s review the case of one client of mine who is now 44 years old. He opened up his universal life contract in 2006, so as of the posting of this article, we had 6 years of history. He funded the policy with $17,000, and his current account value at that time was $15,828, minus the surrender charge (which equaled a net surrender value of $14,652). In this case, we structured the policy for max-cash dump in, and minimum face value, with the goal of getting the policy costs as low as possible.
When you add his 3 costs together (premium expense fee: $100, policy expense charge: $406.44, Base cost of insurance: $46.25) they come to over $500 per year. It makes sense that it took a while to make interest here, but now that he has funded it for several years, I believe we’ll start to see his accumulation value catch up to and surpass his premium outlay.
I, myself, purchased a UL policy several years ago and admittedly did not max-fund it, but came close. Unfortunately, I have been disappointed with my returns as well.
For several years I paid over $200 per month into my policy, with only around $100,000 death benefit, and several years later, I’ve only broken even. I could have bought a 1 or 2 million dollar term life insurance policy instead for way less than $200 per month and invested the difference.
I guess I’ll have to take a lesson from my client above.
Next Steps for Purchasing Your Universal Life Policy
I hope this article gives you a good overview of universal life insurance. We cannot stress enough the importance of life insurance in your life and Huntley Wealth can help you choose the right product at the most affordable price possible. Independent agents have access to multiple companies and we know which insurers offer the best rates when it comes to obtaining universal life insurance.
If you have any additional questions, or would like a free, no-obligation quote, feel free to give us a call at 877-443-9467 or you can use the Instant Quote Box on the upper right hand side of this page.