Universal life insurance sounds like it’s something that’s good for everyone—after all, it’s universal. Yet there are universal life insurance pros and cons; for some people, the pros will outweigh the cons, but for others maybe not. Keep reading to discover our pros and cons of universal life insurance to help you decide if Universal Life Insurance is right for you.
You might also be interested in our article covering our Top Universal Life Insurance Companies.
Universal life insurance pros and cons
|Indexed and variable options|
|Not 100% safe|
|Can be complicated|
Term Life vs Universal Life Insurance
Term life last for a period of time, known as the term. Universal Life is designed to last your whole life or age 121, but it can be tailored to last to a specific age, such as 90, 95, or 100. Term life has no cash value. Universal Life has different levels of cash value accumulation depending on the product type.
So which is best? In order to answer which is best between term life vs universal life insurance we have to know what your need for coverage is. Each of the different types of life insurance policies fill a specific need. Therefore, your need will determine which is the best choice for you, or if some other type of coverage might be a better option, such as whole life insurance.
Whole Life vs Universal Life Insurance
There are similarities when comparing whole life vs universal life insurance, as both are permanent life insurance.
The main difference between whole life and universal life is the premiums. Whole life offers fixed premiums. Universal Life provides for flexible premiums. However, Guaranteed Universal Life offers fixed premiums, but with no to little cash value accumulation, so you really need to understand the different types of universal life insurance available.
There are definitely times when whole life insurance is the best choice. However, when deciding between universal life vs whole life, it is important to consider many factors. One important factor is price. Whole life can be the most expensive life insurance option. If price matters (and for most of us it does) then universal life or term life might be the better choice. For a more thorough picture of when a UL policy might be best, let’s consider the pros of universal life insurance.
Pros of Universal Life Insurance
There are some benefits to having universal life insurance vs a whole life insurance policy or a term life insurance policy.
#1: Cash Value
First on our list of pros for a universal life insurance policy is that it builds cash value. When a life insurance policy has cash value, it means that you can access that cash while you’re still alive. The amount of cash available depends on the amount you have already paid into the life insurance policy; the more you pay into it, the more cash you’ll have available. Your life insurance policy accrues interest, making your cash account grow even more.
To get the maximum benefit, when you purchase a universal life insurance policy, you should pay higher premiums while young; that way the money can gain interest and which may allow your payments to go down as you get older.
It is this flexibility in premium, that helps accelerate your cash accumulation, which might be a benefit for you. Therefore, if cash value is one of your highest priorities, consider a product that can build significant cash value, such as indexed universal life insurance.
The death benefit from life insurance is not taxed, unless your estate is over the federal or state estate tax limit. Cash accumulation occurs tax deferred. Tax deferment is different than tax-free. A deferment delays the time when you need to pay tax on the money you (or your loved ones) receive from the policy. However, the only time you will be taxed on your cash value is when you withdraw money over and above the premiums you paid into the policy. If you take out a policy loan, no taxable event has occurred.
With a UL policy, cash can be borrowed against or can be withdrawn. Please note: If the money is borrowed, the insurance company typically charges a rate of interest on the borrowed money. If it is withdrawn, the money is subject to taxes and fees on any amount above your basis, i.e. the amount of money you paid into the policy.
#3: Flexible Premiums
When you first get your life insurance policy, you may have a lot of disposable income that you want to put towards your life insurance policy. However, we all go through rough patches where money may be tighter than it once was. With a universal life insurance policy, you don’t have to worry about making the same high premiums as you could once afford. You may be able to adjust your premium depending on your ability to pay and also decrease the death benefit to make the policy more affordable.
#4: Lifetime Coverage
The reason most people get universal life insurance is so that they have life insurance coverage for their entire lives. Lifetime coverage gives you the certainty that your life insurance beneficiaries are taken care of, no matter how old you are when you pass away.
For certain estate planning with life insurance strategies, universal life insurance may be the best choice. A crummy trust, also known as an irrevocable life insurance trust, is benefited by permanent coverage, such as guaranteed universal life insurance.
Also, many business owners choose a type of universal life insurance policy when planning for business succession. For example, when funding a buy-sell agreement with life insurance, universal life insurance would be a good option to consider.
#4: Indexed and variable options
Universal life insurance can come in several flavors, but two of the most popular are indexed universal life and variable universal life.
With indexed universal life insurance, your cash value grows alongside an established index, such as the S&P 500. You’ll keep earning a return as long as the market does.
With variable life insurance, your cash value is invested directly into the stock market. This method has the possibility for much higher returns, as well as greater losses that could put your coverage in jeopardy.
Cons of Universal Life Insurance
Wherever you find a pros list for anything, a cons list is sure to follow! Although there are some pros to getting universal life insurance, there are some cons as well.
The first and probably biggest con of universal life insurance is that it costs more than term life insurance. Even though the premiums are flexible, you do have to pay a lot into the policy for it to be worth anything. How much more? Universal life insurance is usually at least three times the cost of term life insurance.
Many financial gurus will tell you to buy term life and invest the difference. However, there are certainly times when that is not the best strategy. There is no one size fits all product. For some, the high cost of universal life insurance vs term life insurance is worth the price.
#2: Cash Value has to be repaid
Though you have cash value for your policy, it’s not for keeps—it is a loan. And like most loans, you should pay it back.
Also, when you borrow from your accumulated cash value, it may jeopardize the value of your death benefit because the insurance company uses your death benefit as collateral on your policy loan. Therefore, if you take out a $100,000 loan and your death benefit is $500,000, your death benefit would be reduced to $400,000.
One way to use cash value is to pay premiums on the policy for a period of time. If finances get tight, or you just want to avoid paying the premium and put the money to use elsewhere, cash in the policy can be used to pay the premiums.
#3: Not 100% safe
Apart from Guaranteed Universal Life, UL policies are not guaranteed and carry a certain level of risk. An indexed universal life insurance policy is less risky than a variable life insurance policy, but it’s not as safe as guaranteed coverage.
The main risk associated with universal life is getting stuck with a higher premium that cannot be paid. When considering whole life vs universal life insurance, the benefit of whole life is that the premiums are fixed. However, you can probably find guaranteed universal life insurance, which offers a fixed premium, for less than whole life insurance.
Once again, it pays to have options and to do your due diligence.
#4: Can be complicated
When you pay premiums for universal life insurance, that money goes into a pool that’s used to cover the cost of coverage, grow your cash value, and cover skipped or lower payments in the future. This pool is what allows universal life to be flexible, but it’s also a delicate balancing act to keep enough funds in your account to cover all these needs. Universal life insurance isn’t usually a set-and-forget-it option.
Should you choose Universal Life Insurance?
While we hope this pros and cons of Universal Life Insurance list is helpful, the real question remains: is a universal life insurance policy a good idea? If you feel that you need to offer your loved ones life insurance protection for your entire life, then maybe a UL policy is right for you.
But the truth is, not many people require a lifelong life insurance policy. Most of the time we purchase life insurance to make sure our loved ones are taken care of should we die unexpectedly. The older you get, the fewer dependents you probably have, and thus having a permanent life insurance policy is not required.
People often opt for term life insurance because it provides life insurance coverage during the time most needed while still being affordable. Better to have the coverage you need for a shorter time than permanent coverage that does not meet your families needs.
Who can help me decide what kind of life insurance policy is best for me?
If you are in need of some trustworthy life insurance advice, turn to TermLife2Go. We are not a life insurance company, and therefore, will never try to push one particular policy simply because it’s our agenda.
We will help you to figure out what life insurance policy and company is right for you and your life situation. We work with dozens of the best life insurance companies in the United States, including the top no exam life insurance companies, and we can help you find the one that is right for you.
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