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Universal Life Insurance Pros And Cons

Universal Life Insurance Pros and Cons

The biggest advantage of universal life insurance over other forms of permanent life insurance is that it delivers the greatest flexibility and freedom for policyholders to change their premium payments, adjust the size of their death benefit or cash value, and adapt their policies to meet their changing financial needs. The challenge of universal life insurance is that it requires policyholders to assume a greater degree of risk and responsibility for maintaining their policies and ensuring that there is no lapse in coverage due to unpaid premiums – greater freedom brings the need for greater vigilance.

Universal Life Insurance Pros

Flexible Payment Options

Universal life insurance policyholders can decide (with some limitations) the timing and size of their premium payments. Policyholders can pay additional premiums to build up their cash value, or skip premiums to conserve their cash. A universal life insurance policy’s accrued cash value can also be used to pay premiums, as long as the cash value does not fall below a certain level.

Adjustable Death Benefit

Universal life insurance gives policyholders the option to reduce their death benefit and boost their cash value. This can be a valuable feature as policyholders’ needs change during the course of their lives – for example, a 30 year old person with young children might want a larger death benefit to provide greater protection for his family, while a 55 year old whose children have grown might want to reduce the death benefit to boost the cash value for retirement savings.

More affordable than whole life insurance: Universal life insurance tends to be less costly than whole life insurance per $1,000 of death benefit. One reason why the costs are lower is that there are more responsibilities and risks for the policyholder – universal life insurance is more of a “hands-on” product, while whole life insurance takes most of the decision making out of the hands of the policyholder.

Guaranteed Interest Rate

The cash value of a universal life insurance policy is guaranteed to grow at a certain interest rate that will never fall below a pre-defined level. This is a benefit for the policyholder, since even though universal life insurance has certain risks, the cash value is guaranteed to grow as long as the policyholder doesn’t draw down the cash value to take loans or pay premiums.

Adjustable Coverage for Changing Needs

People have vastly different insurance needs at different times of their lives – but typical whole life insurance does not allow policyholders to make any changes to their insurance coverage. Whole life insurance is “set in stone” from the moment the policy documents are signed – no matter what changes in health, family circumstances or financial status the policyholder encounters over the next fifty years, his life insurance policy will not be able to change to reflect the changes in his life. Universal life insurance gives the policyholder the ability to choose a higher death benefit or a higher cash value depending on what makes sense for each stage of life.

Universal Life Insurance Cons

Freedom Requires Responsibility

One challenge of universal life insurance policies is that some policyholders aren’t able to handle the freedom. Without the discipline of having to make regular premium payments, some policyholders skip too many payments and end up having a lapse in coverage – which can lead to additional fees, inconvenience or even a denial of benefits. For this reason, many universal life insurance policies offer “No Lapse Guarantee” riders and other optional add-ons to the policy for additional security.

A Complex Product for Savvy Policyholders

Universal life insurance is a more complex product than whole life insurance – which is why universal life tends to be less expensive; some of the burden of managing the policy is shifted from the insurance company to the policyholder, and so the insurance company charges less. People who just want a basic insurance product that they don’t have to spend time maintaining might be better off with whole life insurance.

Non-Guaranteed Cash Value

Universal life insurance does not have a guaranteed cash value – unlike whole life insurance, where the cash value is guaranteed to only increase with time. The cash value of a universal life insurance policy can decrease over time if the policy holder skips too many premium payments – resulting in a drawdown of the cash value balance.

Easy to decrease death benefit, not always easy to raise it: Many universal life insurance policyholders choose to decrease the level of their death benefit in order to boost their cash value or lower their premiums – but keep in mind that it is not always so easy to raise the death benefit back to a higher level. When policyholders want to raise the level of their death benefit, they might have to go through underwriting questions or a medical checkup to make sure they are not at high risk of health problems.

Universal life insurance is meant to be a flexible product for policyholders who want more “hands-on” control over their insurance policy, with options to adjust the death benefit, boost the cash value, and make premium payments on the schedule that is best for them. Policyholders who want more of a “plain vanilla” permanent insurance policy might be better served by choosing whole life insurance.

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Pros & Cons of Indexed Universal Life Insurance

Indexed universal life insurance is getting a lot of interest among those looking for a little investment action with their life insurance protection these days. IUL, also known as equity-indexed universal life insurance, is something of a hybrid vehicle.

Like any whole life insurance product, it guarantees a payout upon death. And, like other types of universal life insurance, IUL holds cash value that goes up over time, as premiums are paid.

The different with IUL is that the policyholder can tie up to 100% of the policy’s cash value to a stock market index, such as the S&P 500 or Nasdaq 100. The remaining portion, if any, goes to a fixed account. If the indexed account shows gains (calculated usually over the course of a month), a percentage of the interest income, called the “participation rate,” is added to the cash value of the policy. If the index falls in value or remains steady, the insured’s account nets little or nothing.

Although it reflects the performance of securities, IUL is not an investment security itself. “The cash value is not [actually] invested in the market or an index. The index is just a measuring device to determine the interest crediting rate on the cash value account,” explains Jordan Niefeld, CPA, CFP, of Raymond James & Associates in Aventura, Fla.

The Upside

Growth

The most significant advantage of IUL insurance is the potential for healthy gains in the cash value – gains that can be significantly higher than those possible on many other types of financial products, including traditional universal life or whole life insurance policies.

Policyholders also get the benefit of a crediting floor, typically 0% or 1%, so the existing cash value is protected from losses in a poorly performing market. “If the index generates a negative return, the client does not participate in a negative crediting rate,” says Niefeld. In other words, the account will not lose its original cash value.

Tax Advantages

The cash value accumulates tax-deferred, and the death benefit is tax-free for beneficiaries. Loans made against the policy are also tax-free in many cases. Premiums are paid with after-tax dollars, so partial and full withdrawals (up to the amount of premiums paid) are tax-free, too.

Other Perks

Niefeld points to a variety of riders that are available to make the policy more attractive (and valuable), including guaranteed premiums, guaranteed death benefits and provisions for long-term care and critical illness.

The Downsides

Limited Gains

Increases in the cash value are limited by the insurer. The insurer makes money by keeping a portion of the gains, including anything above the cap. “The interest crediting rate cap maximum is 10% to 12%, depending on the product,” explains Niefeld. “If the index generates a return greater than the cap, the maximum crediting rate is based on the cap.”

The crediting rate cap may prove disappointing in an unbridled bull market, warns Niefeld. In that case, the investor’s money is tied up in an account that may underperform other investments. (See Comparing IUL Insurance to IRAs and 401(k)s.) Also, the insured may realize no gains at all. “A series of negative returns on the index can generate a 0% interest crediting rate” to the policy, he cautions.

Promises, Promises

The potential rate of return is inevitably presented in its most favorable light by the companies that sell the policies. Of course, large returns are not guaranteed by any sales rep who wishes to keep his license to sell, but many of the advisors who steer away from IUL products pragmatically point out that returns can in fact be far lower than policyholders are encouraged to anticipate. Lack of understanding of the complex calculations can also contribute to unrealistic expectations – policyholders may not fully grasp the costs that inevitably eat into profits.

Risk Factor

As with any product tied to equities, IUL isn’t 100% safe. IUL insurance carries greater risk than standard universal life insurance, but less than variable life insurance policies (which do actually invest in stocks and bonds). “The additional client risk is due to interest rate crediting fluctuations,” says Niefeld.

Also, the premiums could rise. Although they are designed to remain steady, “if the measuring index performs consistently below the anticipated rate, premiums may increase in future years.” For more on potential pitfalls, see Indexed Universal Life Policies: Watch These Risks.

Taxes

In the event of death with outstanding loans against the policy, the outstanding loan funds may be subject to regular income tax. In the event of policy cancelation, gains become taxable as income. Losses are not deductible.

Fees and Costs

Fees are typically front-loaded and built into complex crediting rate calculations, which may confuse some investors. Fees can be very high. Costs vary from one insurer to the next and also depend on the age and health of the insured.

A few fees to watch for include:

  • Premium expense charge – usually deducted from the premium before it is applied to the cash value
  • Administrative expenses – usually deducted monthly from the cash value of the policy
  • Insurance costs – additional deductions taken from the policy to cover the death benefit, supplemental benefits and riders
  • Fees and commissions – some policies charge upfront or annual fees for setting up or managing the account
  • Surrender charge – the amount forfeited if the policy is canceled or if loans or withdrawals are made. In some cases, taking a partial withdrawal will also permanently reduce the death benefit.

Canceling or surrendering a policy can lead to more costs. In that case, “the cash-surrender value may be less than the cumulative premiums paid,” says Niefeld.

The Bottom Line

To supporters, an IUL policy is the best of both worlds. Along with a death benefit, policyholders get a fixed contract with no direct investment in the market. They reap all (or much) the benefit of stock market booms and are protected from the pain of busts.

Detractors caution that IULs can be expensive, with a myriad of hidden fees and costs. Furthermore, they are complicated, advanced financial products that require a deep understanding on the part of the insured.

Nevertheless, an IUL policy could be a good investment option for the inexperienced, because there are no actual investment choices to be made. Because of the floors and caps, IUL “is much closer to a fixed-income product than an equity product,” Niefeld says. The ideal customer is “an individual who wants/needs life insurance, does not have the risk tolerance for a variable product, [but] would take some risk [in order] to receive a crediting rate higher than a fixed rate of return.”

Universal Life Insurance | Insider’s Guide to Benefits, Pros & Cons

By Chris Huntley

Experts agree universal life insurance is the affordable alternative to whole life insurance.

But is universal life right for you, and how does it work?

… or perhaps you’re just looking for the best pricing, or how to save the most money.

We can help!

Just click below to quickly navigate through our universal life insurance pros and cons guide.

Quick Guide to Universal Life Insurance

  • How much does universal life cost? (Sample Quotes)
  • Pros and Cons of Universal Life

Definition: What is Universal Life Insurance?

Universal life insurance is a form of permanent life insurance that may provide life insurance protection along with the benefit of flexible premiums, and cash value buildup, similar to the savings element in whole life insurance.

That means when a premium is paid, a portion of the premium pays the actual cost of life insurance, and the remainder of the premium is applied to a sort of built-in savings account in the policy known as the cash value.

The cash value account may earn a fixed interest or be credited with earnings based on the performance of major world indexes such as the S&P 500.

Since cash value is present, the owner may be able to miss payments for a year (or several years). Lastly, universal life policies may provide coverage for life if cash values are high enough to sustain the ongoing cost of insurance.

​What Are The Types Of Universal Life Insurance?​

Indexed Universal Life

This type of universal life policy is fixed and is for someone who is ​fine with their returns being attached to a stock index such as the S&P 500.

You are protected with a downside of zero so your money is always protected.

​However, the upside has great potential. Just remember that your interest crediting moves with the specific index that your policy is attached to.

Guaranteed Universal Life

This type of universal life insurance is NOT whole life insurance.

However, it has been designed to last for your entire life.

The rates are guaranteed to never increase as long as the premiums are paid and your death benefit will always be in-force.

Think of it like a term life insurance policy that lasts for your whole life instead of the normal 10, 15, 20, or 30 year fixed term.

Instead of your rates being attached to specific term lengths, GUL policies are priced to specific ages like (to 90, 94, 100, or 115).

The further out the age, the higher the monthly premium will be, but it’s also a higher probability that the death benefit will pay out.

This is a relatively new type of policy and it is really popular and can save you lots of money, especially for people over the age of 60.

Variable Universal Life

This type of universal life policy allows you to manage different types of mutual funds directly through what’s called “separate accounts” with the cash value that your policy has built..

It’s a type of permanent life insurance and the performance of your variable universal life policy will depend on the performance of the mutual funds you are managing.

Depending on your policy performance some months you could have $0 premium payments while at other times you could owe the max per month permitted by the IRS.

This really can come in handy or be huge mistake, we wouldn’t recommend this type of policy unless you want to be actively involved in your life insurance at the least on a monthly basis.

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Universal Life vs. Guaranteed Universal Life:

An Opportunity for Massive Universal Life Savings!

In this post we’ll be speaking mostly about what is commonly known as “guaranteed universal life insurance.”

… the affordable alternative to whole life insurance.

To be clear, the definition of universal life is VERY different than the definition of guaranteed universal life.

Traditional Universal Life – “UL”

  • may offer lifetime coverage
  • allows flexible premiums
  • builds cash value (values may be available for withdraw or loan)
  • some people borrow/withdraw cash value funds for supplemental retirement income
  • if premiums aren’t paid and there is no cash value available to pay the cost of insurance, the policy lapses (cancels)

We rarely recommend traditional UL, especially if you’re simply looking for guaranteed lifetime coverage.

Guaranteed Universal Life – “GUL”

  • may offer lifetime coverage
  • premiums are inflexible – typically must be paid when due or policy will be in danger of cancelling
  • there is typically little to no cash value available for withdraw or loans
  • a “no lapse” feature is added to these policies which guarantees the policy will not cancel , even if the cash value is ZERO (as long as premiums are paid)
  • typically costs less than traditional “UL”

Universal Life vs. Whole Life:

As stated, universal life insurance is a form of ‘Permanent Insurance’, as it may offer lifetime lifetime protection, and is similar

to Whole Life Insurance, but to be clear there are indeed differences.

The big differences come in the way of:

– and guaranteed lifetime coverage

In universal life, if you skip a premium, the cost of insurance is deducted from your cash value.

In whole life, if you skip a premium, the cost of insurance is borrowed from your cash value, establishing a loan.

Standard universal life insurance policies typically “hope” to provide coverage for life (through age 100) but are rarely guaranteed to do so. Much of the policy’s performance has to do with how much interest the cash value earns over the life of the policy (which typically is not guaranteed), and whether the owner withdrew/borrowed money from the policy during his/her life.

In whole life, on the other hand, if you pay your premiums, you’re guaranteed to have coverage for life, (assuming you don’t withdraw/borrow from the policy.)

  • may offer lifetime coverage
  • builds cash value (values may be available for withdraw or loan)
  • some people borrow/withdraw cash value funds for supplemental retirement income
  • if premiums aren’t paid and there is no cash value available to pay the cost of insurance, the policy lapses (cancels)

We rarely recommend traditional ​whole life, especially if you’re simply looking for guaranteed lifetime coverage.

Guaranteed Universal Life – “GUL”

  • may offer lifetime coverage
  • premiums are inflexible – typically must be paid when due or policy will be in danger of cancelling
  • there is typically little to no cash value available for withdraw or loans
  • a “no lapse” feature is added to these policies which guarantees the policy will not cancel , even if the cash value is ZERO (as long as premiums are paid)
  • typically costs less than ​”​Whole Life”

“FIX” YOUR UNIVERSAL LIFE RATES

Want to know the problem with regular “universal life”? If the cash value decreases too low, your policy can lapse and you can lose all your money. That’s why we only sell GUARANTEED UNIVERSAL LIFE. It offers lifetime guaranteed level premiums, and as long as you pay your premiums, your policy can’t cancel. It works just like term, but for life!

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 form on the right side of the page (or the quote form below) and choose the term option, “LIFETIME.”

Sample Guaranteed Universal Life Insurance Rates

Most companies don’t like to give free life insurance rates away without collecting your personal info, but I think it’s only fair to give you a ballpark idea of how much universal life insurance costs.

The quotes below are specifically for guaranteed universal life:

​AGE

$100,000

$500,000

​40 Years Old

​$53.88

​$249.50

​60 Years Old

​$138.06

​$611.25

*Quotes above are for a male, non-smoker who qualifies for the best health class and are monthly rates. Not an offer for insurance. Your rates may be different depending on your specific situation. Prices accurate as of 6/13/17 and are subject to change.

Note: to Get a Universal life insurance quote using our quote form, select “LIFETIME” in the Term Dropdown menu.

The Pros of Universal Life Insurance

Flexibility:

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.

Permanent Coverage:

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.

Tax Deferment:

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.

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