“What is universal life insurance and is it right for me?” is a question you may ask yourself.
Universal Life Insurance differs from term life insurance and whole life insurance. Making sure you know what your current and future financial needs are will help determine which life insurance product is right for you and your loved ones.
What Is Universal Life Insurance?
Universal life insurance is another type of life insurance product that can play an important role in protecting your family and loved ones. If you need lifetime life insurance coverage, then a universal life (UL) insurance policy may be the ideal insurance product for you.
Some people may initially think of a universal life insurance policy as an alternative to other financial investments. A universal life vs. 401(k), or universal life vs. 529 plan is like comparing apples to oranges. They are different insurance products, with different purposes, and different intended financial objectives.
Universal life insurance is also called “permanent insurance,” as it can offer lifetime insurance protection (similar to whole life insurance). However, there are distinct differences between whole life versus UL insurance that should be considered.
One Big Difference Between Whole Life & Universal Life
Whole life insurance does not allow you to pay flexible premiums – universal life insurance does.
Within a universal life insurance policy is a fund, called a cash value account (essentially a savings account within the insurance policy). Excess money invested (additional cash beyond the actual cost of the insurance) gets put into this account and earns a modest rate of interest (a contractually guaranteed minimum as stated in your insurance policy).
One of the key benefits of this cash accumulation account is it grows over the years within your insurance policy. The cost of your insurance premium may be pulled from your cash value in the future. This means you have the option not to pay premiums later if there is sufficient cash value within the policy!
This non-payment benefit, however, is not a guarantee. If the cash value portion in your account underperforms or you have not funded your life insurance policy adequately, you may have to pay a higher premium later to keep your insurance coverage in force.
Universal vs. Term
Remember that a universal life insurance plan is a permanent life insurance policy. Its main purpose is to provide insurance protection for your entire life. If you only need life insurance protection for 20 years, get a 20-year term policy – not a universal life policy.
A universal life policy uses similar calculations as a term life policy to determine the premium amount to be paid on a monthly or yearly basis. However, instead of taking the average over 10, 15, 25, or 30 years, you pay the average price to insure yourself up to age 100.
Term insurance has no cash value, so if you cancel your term policy, there would be no money returned to you.
Term life insurance behaves like auto insurance. You pay your monthly premium to the auto insurance company, and if you do not get into an accident, you do not get your money back.
You pay the insurance company a little money each month (your premium) to transfer the risk of losing a greater amount (your car replacement/repair) if you get in an auto accident. Again, if you do not get into an auto accident, you never get your money back.
We always tell people that, if you get to the end of your term life policy and you are still alive – YOU WON!
Three Components Of A Universal Life Policy
1. The Death Benefit
You typically have two options when deciding how you want the policy death benefit paid to your beneficiary:
“Option A” level death benefit:
This is a level death benefit. It will stay at the amount you initially selected for the life of the policy, regardless of the cash value accumulated.
The primary advantage of “Option A” is it lowers your premium cost. Option A is the most popular UL option, as it provides the highest death benefits compared to the premium amount.
The death benefit does not increase under Option A, unless excess premiums are paid into the policy’s cash value.
“Option B” death benefit:
This option is a combination of a death benefit that you choose when setting up the policy, plus the cash value that will accumulate and build over time within the policy.
The ideal purchaser for this product may be a person who wants permanent coverage, a higher death benefit, and is less concerned about cash accumulation.
2. The Cash Accumulation Component
A portion of your monthly premium goes into an interest-bearing account within the life insurance policy. A popular option is called equity index universal life. This allows you to participate in the financial gains of a major stock index, with no risk of losing your principal – the S&P 500 is one such example.
Your money is not invested in the S&P 500, but is indexed to the S&P 500 to receive gains when they occur.
3. Flexible Premium Option
The biggest difference between a universal life policy and a whole life policy is you can stop paying your life insurance premiums with a universal life policy in the future. The only requirement is there is sufficient cash value available to pay the actual cost of the insurance premiums.
With a whole life plan, you cannot change your premium amount if your budget changes; you are locked into your premium amount.
Do You Want Guaranteed Insurance Up To Age 100?
If you want guaranteed life insurance up to age 100, then make sure your plan is a guaranteed universal life insurance plan. This means, if you pay your premium or the cash value in your policy pays the premium, your death benefit will be guaranteed.
As with all financial planning, it is wise to be conservative in your future income estimates.
When you talk with your life insurance agent, they should provide you with an illustration with two columns; one is for guaranteed values, and the other is for assumed values. Focus solely on the guaranteed column, as this is what your insurance plan is contractually guaranteed to pay your beneficiaries; assumed values are always estimates or guesses on what will happen.
Universal life insurance policies are a unique life insurance product that can guarantee lifetime insurance coverage. Use term insurance for short-term obligations and other insurance products, life Universal life insurance, for longer periods of time.
Life-Wealth-Win Life Insurance and Wealth Services would love to help you get your loved ones, family, and business protected! Call us or get your free life insurance estimate by clicking the link below.