Quick Page Guide:
- What Is Universal Life Insurance And How Does It Work
- Why index universal life insurance
- The way in which the death benefit really works
- Insights on how cash value works in universal life insurance policy
- Comparing universal life insurance company
- Universal life insurance vs. term life insurance
- Universal life insurance vs. whole life insurance
- Universal life insurance offers:
- Whole life insurance offers:
- Universal life insurance quotes
A comprehensive permanent life insurance contract that lasts for your entire life. Provided that the payments are paid, coverage will never end and benefits are guaranteed to be paid to the insured’s beneficiary. The “cash value” of the plan is also very flexible, and terms can also be changed, such as the payout structure or beneficiary.
The flexibility of the cash account is a major selling point. The money can also be invested in the money market fund, stocks, bonds, etc. This allows for greater flexibility and more financial freedom for both policyholders and beneficiaries.
Another huge benefit to UL Insurance is the payout could be used to defray the cost of the premium past a proscribed point. This allows for a responsible, stable investment with little risk involved.
In this case, some of the premium payments go to funding the savings element and the death payout. For the coverage to remain active, payments may be made either through the premium payments or through a reduction in the cash value of the policy.
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Why variable universal life insurance?
According to Investopedia: Variable universal life (VUL) is a type of permanent life insurance policy with a built-in savings component that allows for the investment of the cash value. Like standard universal life insurance, the premium is flexible. VUL insurance policies typically have both a maximum cap and minimum floor on the investment return associated with the savings component.
VUL insurance has investment subaccounts that allow for the investment of the cash value. The function of the subaccounts is similar to a mutual fund. Exposure to market fluctuations can generate significant returns, but may also result in substantial losses. This insurance gets its name from the varying results of investment in the ever-fluctuating market. While VUL insurance offers increased flexibility and growth potential over a traditional cash value or a whole life insurance policy, policyholders should carefully assess the risks before purchasing it.
UL Insurance is great for large estate planning, especially if and when tax-free retirement accounts become maxed out. It is a relatively risk-free way to ensure future cash flow for the beneficiary.
Universal life insurance example
There are two types of death benefits: Level and Increasing. With a Level benefit, payout remains the same over time. Alongside an increasing benefit, the payout increases over time.
The best option for you varies on your situation and is better talked about with a Coach B. agent.
Exactly which will be better? Well, that will depend on one’s end goals. That’s a concern that will be best talked about with a licensed insurance professional, such as a Coach B. Agent.
Universal life insurance pros and cons
If your trying to decide if this type of insurance is right for you then you should weigh the pros and cons of a universal life policy.
Pros of universal life
The major benefits of universal life are flexibility and cash value growth.
Flexible premiums. Universal policies allow you to change the size and frequency of your payments, which can be handy when times are lean. However, underpaying may result in a decrease in coverage, so check with a financial advisor before making any changes.
Flexible death benefit. You have the option to increase the death benefit if you need more, but you’ll likely need to take a life insurance medical exam to qualify for the extra coverage. If you want to decrease your death benefit, you can typically do so after the policy has been in force for a few years.
Potential cash value growth. The money in your cash value account will earn interest at the market rate based on the insurer’s general account investments. This means it’s possible to earn more than you would in a whole life policy, which has a flat guaranteed rate.
Cons of universal life
Universal life’s benefits are also its disadvantages.
Increased responsibility. If you don’t pay attention to the value of your account, it may become underfunded, which could leave you with a series of large payments to maintain the coverage you signed up for.
Increased risk. Market rates bring volatility. When interest rates are rising, universal life insurance looks like a great product. But if they drop, your cash value account may not perform as you’d hoped. Universal life insurance policies typically come with guaranteed minimum interest rates, so they won’t drop below a certain amount if the market crashes.
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Some common problems with universal life insurance
You can choose how much to pay based on your current financial situation, but the actual cost of insurance will continue to increase as you age. For example, you’ll need to pay premiums that are much higher than your cost of insurance in the first years of your policy to build up a cash value to dip into once your cost of insurance exceeds your budgeted premium. If you don’t, the policy could lapse, especially if it doesn’t have a no-lapse guarantee clause.
Must Monitor Policy’s Cash Value
During the sales process, agents will typically provide illustrations of how your savings could build, but these estimates are not guaranteed. Keeping track of how your cash value is doing and frequently asking your insurance company for illustrations is crucial to ensure you’re getting the best possible outcome. If you don’t review these illustrations and make adjustments accordingly, the cost of your policy could skyrocket.
Potential Negative Returns
While universal life is a form of permanent life insurance, the policy will stay in effect only as long as the cash value is enough to cover the cost of insurance — unless you have a no-lapse guarantee. This means the market could work against you, and some policies allow the insurance company to dip into your cash value to recoup losses. Even worse, when your cash value hits $0, your provider can require you to make up the difference in the death benefit premiums or risk the policy expiring with no value. Your policy could lapse if interest rates fall below projections or insurance or administrative expenses increase. Make sure you understand the terms of your policy and your comfort level with investing in the market before committing to this type of coverage.
Conservative Interest Rates
While interest rates are dependent on the market, they can be relatively conservative, meaning it could take a significant amount of time for your policy to accumulate cash value.
Some plans offer a “no-lapse” guarantee, which means the policy is always in effect. However, to get this guarantee, a company may require you to make payments on time, even going so far as to cancel policies if you pay just one day late.
6 Basic disadvantages of universal life insurance
- Cash Value Can Fluctuate with Markets on Certain Plans
- Flexibility Can Mean a Reduced Death Benefit
- Universal Life Makes Less Sense for Those Who Don’t Want a Permanent Plan
- You Have to Keep Paying Premiums Until You Pass Away
- Not Wanting Cash Value Can Lead to Disadvantages of Universal Life Insurance
- Managing a Universal Life Insurance Policy Can Be Complicated
Best universal life insurance
By way of the example in the table to the right, one could notice that not every one of the companies is competitive in their rates when it comes to life insurance.
Although Sagicor and Banner Life (both very good companies) are quite close to American National, State Farm’s insurance plan happens to be two times as expensive to have the exact same basic coverage.
Therefore this happens to be the reason why we highly encourage one to talk with a professional independent broker who deals with dozens of companies that can assist in finding you an affordable price, for instance, a Coach B. agent, instead of buying life insurance from somebody who works for just one company.
40-year-old non-tobacco male in Kentucky, standard health, for $100,000 face amount.
Universal life insurance policy vs whole life
The big difference here is actually inside the cash value plus payout. A Whole life insurance policy will only ever be paid out following the policy ending (at the death of the insured).
UL Insurance comes with a flexible cash account and can be drawn upon throughout its term.
Both kinds of insurance policies permit for the purpose of the tax deferment involving your current cash account along with providing the chance of borrowing against the cash built up in the contract.
That being said, whole life insurance won’t allow for changes in the payout.
Though many plan types allow for skipping premiums provided certain circumstances become met, whole life will require that these be paid off in order to continue insurance coverage, whereas UL can simply use premium skipping to defray that eventual payout total.
Interest accumulation is different as well. UL policies modify interest continually, whereas whole life policies adjust annually.
Universal Life Insurance Offers:
- An actual cash value element that permits you to miss premium payments because long as you have enough funds built-in place to cover the cost of insurance premiums. Indeed there might be an initial period — for example, your first year — during that you are not able to access this component of the insurance policy.
- The potential to increase and decrease the policy death benefits, as needed, based primarily upon your current conditions.
- One’s capability to be able to borrow against the cash value (in many instances).
Whole Life Insurance Offers:
- One possibility concerning the cash value element of the plan to improve on a tax-deferred basis (as well as universal life). Many whole life plans allow for distributions and loans.
- A locked-in death benefit that might not really increase or decrease even though the insurance policy is in force.
- The capability of skipping premium payments underneath certain situations. However, the premium is subtracted from the policy’s cash value because a loan you will need to repay, usually with extra interest.