Is Universal Life Insurance Right for You?

Universal Life Insurance Policy Basics

Starting out - how do you decide on different insurance choices

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Universal life insurance (UL) is a hybrid life insurance policy that combines elements of term life insurance with an investment savings option. Universal life combines the ability to build savings at the same time as providing you with a life insurance policy. This provides an advantage by allowing you flexibility in what you can do with the savings or investment portion of the premium. Universal life insurance contains an element of long-term investment strategy working both as a life insurance policy and an investment or savings tool, it is generally more expensive than term life insurance because of this.

Here are the basics about universal life insurance to help you understand if a universal life policy is a good life insurance choice for you.

How Does Universal Life Insurance Work?

A portion of the universal life insurance monthly premium is put into the cost of the life policy which will provide the death benefit to your beneficiary and another portion of the premium is invested so it can be used as investment savings. The concept is that the investment will grow over time and eventually may even be able to pay for the premiums of the life portion of the policy. The advantage in this situation would be that you could pay into for a certain number of years and the investments would eventually start to cover the cost of the premium, then you end up getting life insurance for whole life, yet don't need to keep making those payments. 

Although the traditional version of universal life insurance was a popular and safe option a couple of decades ago, as the financial situation of the past two decades has seen periods of instability, the advantages of the traditional universal life policy have diminished and become riskier.

Universal life is different than term life insurance because of the investment factor of the premiums. If the premiums are invested in unstable markets, then your entire investment could be at risk.

Indexed Universal Life Insurance (IUL) vs. Universal Life (UL)

There are two kinds of universal life insurance policies:

  1. Traditional Universal Life Insurance (UL)
  2. Indexed Universal Life Insurance (IUL)

Due to the fluctuations in the stock markets, the traditional UL insurance model may be too risky, therefore if you are looking at a life insurance option that will help you with savings, then make sure and discuss the effects your investment portion will have if the stock market is in a downturn.

The success of a universal life insurance plan depends greatly on the investments in the plan you choose and market performance. In past years, there were concerns with the values in the investment portion of universal life insurance because of unstable markets. As a result, indexed universal life insurance (IUL) evolved to address concerns with changing markets and some of the problems faced in the past. When considering universal life insurance, IUL seems to provide more safety than UL.

It is important to ask your financial planner about these options and see how they fit your needs and long term strategy.

Indexed Universal Life Insurance

If you purchase universal life insurance early in life it can afford a great opportunity to build savings with variable interest rates, flexibility, and cash out options. Along with providing a death benefit, universal life insurance also incorporates a savings vehicle. In short, it is like combining a term life insurance policy with a tax-deferred interest accumulating savings account.

Make sure you have a knowledgeable insurance agent to review your other options such as term and whole life insurance. Universal life insurance is a choice that requires some research and solid financial planning advice. Discuss what happened with universal life insurance in the past, to understand how you will avoid the downfalls of what too many people went through when the markets turned. It is important to feel comfortable with your decision. It's your money and a good strategic plan will build your wealth, but a poor decision could cost you thousands.

Many people lost their life insurance policy or investments when they invested in a traditional universal life policy in the past 20-30 years, however, the new indexed universal life policy has been developed to provide safer options. Choosing a smart policy will help you build your assets and build your wealth while securing a death benefit for your beneficiary.

Cash Value and Building Wealth

Universal life insurance policies provide an option for a life insurance death benefit ​while helping you build savings that can be cashed out, or moved from the investment portion of the policy to the life insurance premium of the policy as your conditions in life change. Cash-value life insurance policies like a universal life insurance policy may also be used as vessels to save money for other larger investments, like saving for a down payment on your first home.

A universal life insurance policy allows you to build your wealth while assuring that you have a solid life insurance policy in place, as opposed to term life insurance.  

The major advantage of the universal life insurance policy is the potential to not have to pay life insurance premiums for life, yet still, be insured into your retirement. As you get older and have more financial responsibilities, being able to cut down on costs like life insurance is a definite advantage.

If you are older, then a universal life policy may not make as much sense as a whole life policy which is a safer investment and provides additional advantages.

When to Buy Universal Life Insurance

Buying universal life insurance early on in life, like your 20s or 30s will allow the greatest opportunity to build your assets.

The concept of the universal life insurance policy would be to have it for at least 10 to 15 years before you start to cash out or shift investments. If you purchase a universal life policy in your twenties, you could be secured to have a policy for life by the time you settle down and have kids, and you might even be able to use the asset portion as a down payment on your first home. However, this all depends on the type of universal life you choose and the market performance.

Keep in mind that when purchasing life insurance when you are younger, you will benefit from lower rates, so if you think life insurance is expensive now, remember that it will only cost more as you get older. Your overall life strategy should come into play when you decide on life insurance.