Are you thinking about purchasing a universal life insurance policy but confused because you do not know the benefits and drawbacks that come with it? Well! Do not worry! This blog post is the solution to this problem.
Universal life insurance, a type of permanent life insurance, is a flexible yet complex insurance plan. Investing your cash value offers you adjustable premium payments and potential growth. However, skipping premiums or accessing the cash value comes up with risks.
In this blog, we will discuss in detail all the possible advantages and drawbacks that universal life insurance may offer. But start with understanding the term what universal life insurance exactly is.
What is Universal Life Insurance?
Universal life insurance is another name for cash value insurance that lets policyholders adjust their premium payments and the death benefit. Some of these insurance policies also have investment options that help the insured with their potential growth.
Like all other life insurance plans, this plan provides a death benefit to the designated beneficiaries when the policyholder dies. However, it’s different from whole life and term life insurance but is available as equity-indexed universal life and variable life policies.
Pros and Cons of Universal Life Insurance Policy
Now it’s time to move towards universal life policy’s benefits and drawbacks.
Pros of Universal Life Insurance Policy
1- Flexible Premium Payments
This policy does not have a rigid premium method that can be very helpful if you have an irregular income. For instance, you can skip or decrease your payment amount and pay in installments when you have money. This makes universal life insurance different from term life and whole life insurance because they require a regular premium to maintain the coverage. However, you must keep enough cash value in your policy to pay expenses. Otherwise, you may lose coverage and face tax consequences.
2- Death Benefit
You can choose between enhanced or level death benefits for universal life insurance. If you choose the increasing option, your beneficiaries get the face amount of the plan with the cash value, but it can be expensive. Moreover, with the level option, they receive the face amount only.
3- Cash Value
Universal insurance offers you a cash value that grows with time. When you build up a substantial amount, that can be used to pay internal costs and keep the policy in force for your whole life; additionally, you can also get a loan from the cash value or withdraw the funds from the policy. And if you decide that you no longer need coverage, you can easily recapture more than what you paid into your policy.
4- Various Investment Options
You can invest in your variable universal life policy if daring enough to take risks. It allows you to invest the cash value in market investments the same as mutual funds. If your luck goes well, the cash value will grow and reduce your payment, which may lead to a bigger death benefit.
But losing money in the market or experiencing less growth would be the case sometimes. If this happens, you must pay more into the policy to fulfill ongoing policy expenses and keep the coverage going.
Drawbacks of Universal Life Insurance Policy
1- Policy Lapse or Risk of Large Payment Requirements
On the one hand, universal life insurance is flexible as it offers you lower premiums and easy withdrawals at times; on the other hand, you must check your accounts carefully. Because if your cash value drops to zero and your premium is not enough to cover the insurance cost, your policy can lapse.
2- Returns are not Guaranteed
When you invest, and interest rates drop, your investment may not perform well. Unlike whole life insurance, this policy does not get a guaranteed rate. But do not worry; most universal life policies come with a minimum rate to limit your losses.
3- Some of the Withdrawals are Taxable
You might be surprised to know that when you withdraw some of the cash value from your policy, it will be taxable. Life insurance payments are typically taxed on a first-in, first-out policy. It means the insured will get their investment in the contract before getting gains in the policy. But if you withdraw more than you have paid into your policy, your withdrawals will be taxed.
4- Cash Value Lost at Insured Death
When the policy’s owner dies, the insurance company keeps the policy’s cash value. And the beneficiaries will get just the death benefit. There is a policy that the insured can only use the cash value before their death. Some insurance policies allow their policyholders to enhance the death benefit when enough cash value is buildup.
Frequently Asked Questions (FAQs)
How to get universal life insurance?
Each life insurance policy is tailored based on the insured’s needs and financial strategy. As universal life insurance policy’s premiums are flexible, a healthy 40-year-old man has to invest $8,000 a year for a $1,000,000 universal insurance plan. However, contact an insurance professional for the best solution if you need guidance.
What are the possible alternatives to universal life insurance?
Selecting the right type of life insurance will save you money and ensure protection for your loved ones. Term and whole life insurance are the alternatives to a universal plan. However, it’s best to explore the pros and cons of each available option to get the best one.
What is the difference between universal and whole life insurance?
Universal life insurance allows you to use the cash value to pay the premiums or other expenses of the policy. Still, with whole life insurance, you cannot use your policy’s cash value payment.