“Universal” life insurance policies can also be referred to as one of the “permanent” types of life insurance.
Universal policies can vary in Death Benefit Amounts (i.e. $500,000, $1,000,000) and in the specific use of the policy (i.e. Family Protection Purposes, Estate Planning, Wealth Accumulation, Supplemental Retirement Income, etc).
The best candidates for Universal Life policies are those individuals who know they want a certain amount of life insurance for their lifetime.
Unlike the more “bare-bones” Term Life Insurance policies, Universal Life policies can allow for flexible payment options of your premium. For instance, your quoted monthly premium may be $500/mo. However, you are free to pay more (and have the excess money go into a separate interest-paying account within your policy that grows tax-deferred) in any given month, or even pay less if you need to (having the insurance company deduct the minimum monthly insurance amount from your separate account within your policy.
With Universal Life Policies, insurance companies offer you a policy based on several criteria. For example:
For a 30-yr old male, smoker, $500,000 death benefit, lifetime coverage.
This says a 30-yr old male who smokes, is seeking a life insurance policy on himself with a death benefit of $500,000, and will need this policy for his lifetime.
We can create this policy to cover him to pretty much any age he wants to cover himself to. When we do “lifetime” policies, we typically create them to cover up to age 121. We can however, adjust that age to whatever the policy owner wants, if they have a preference.
We also can create this policy to have an added savings vehicle characteristic that allows him to “over fund” his policy, allowing him to put money into an account that pays more interest than a typical bank savings account or CD, with the added benefit of tax-deferral if he leaves it in the account to grow. This is particularly useful to those people who have maxed out their retirement contributions at work but need/want to save more.
Advantages of Universal Life Insurance Policies
- Universal Life Policy holders pay for insurance, but unlike term policy holders, have their Cost Of Insurance (COI) averaged out over a longer time period (typically to age 121) than a typical term time period of 20 years. So while a Universal Life Insurance Policy holder may pay a higher premium than a term policy holder in their younger years, their premium will not rise as they age. In other words, the best time to buy a Universal Life Insurance policy is “Right Now.”
- There is a savings/investment component in a universal life insurance policy. This savings can be used for later in life. Believe it or now, this savings account can also be used to “pay off” your entire cost of insurance over a specific time period. For example, if you paid your premium faithfully for 20 years, it’s not uncommon to have a balance in your savings account equal to (or greater than) your entire total of payments over the years you had your policy! In other words, if you decide to cash in your policy at that point, you’d have had insurance coverage over those years free of charge! In that case, that cheaper term insurance policy one chose to get 20 years ago actually ended up costing substantially more.
- You can choose from a number of “Riders” that allow you to custom-tailor your policy to your exact needs. Think of a Rider as a purchasable option, like how you can purchase options on a new car or truck you need to buy. Need a Terminal Care Rider? No problem. Need a No-Lapse Rider? Again, not a problem. Different insurance companies offer a number of different riders for their policy holders.
- Are you facing a substantial estate tax liability? The best and most economical vehicle to use to pay off Uncle Sam is a specially tailored Universal Life Insurance policy. Estate planning is especially needed for families who own businesses that employ more than one generation. Not doing correct planning utilizing carefully crafted life insurance policies have cost many families their businesses when Uncle Sam came calling 9 months later for his estate err, death taxes.
- Would you like to have a single policy that covers both you and your spouse? A Universal Life policy can do that!
- Universal Life policies allow flexibility of premium payment amounts, and of the timing of your payment.
- Your policy and money inside the policy are safe. In our opinion, for large balances, your money is safer than in an FDIC-insured deposit account due to the limitations on what you’re insured to at the bank.
- Rates of return on Universal Life policies are typically higher than bank savings accounts and CDs, with similar (often better) safety.
- By adding certain riders, you may be able to eliminate other types of insurance you may own.
Disadvantages of Universal Life Insurance Policies
- Because of the savings component built into the policy that allows you to have coverage for life, your premiums in the early years will be more than a term life policy taken out at the same time.
- The premium amounts for a Universal Life policy can cost more than those of an Index Universal Life Policy due to internal rate of return assumptions.
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