Universal life insurance often comes up when you apply for and trade for life insurance. But it is a complex product that can be difficult to understand when trying to tear out the costs and risks.
Universal life insurance is a type of permanent insurance that provides a death benefit and a cash value component that acts as a savings account and can grow during the life of your policy. Universal life, like all other permanent life insurance policies, is designed to provide lifetime coverage, as premiums can stay as long as you live.
The cash value has a general life insurance policy, especially since it can be used to cover your premiums over time, can be attractive to those who shop for insurance. But for most people, the much higher premiums, fees and life insurance risks offer a better alternative. In fact, these complexities have led many people to lose their policies in recent years after paying premiums for decades.
It is a good idea to have a deep understanding of a universal life insurance product before you buy
Here are some details you need to know.
How universal life insurance works
Universal life insurance is a type of permanent insurance. Which means, as long as your premiums are paid, you get life insurance. The policy never ends.
But even if life insurance at any age is unpaid, what makes permanent life insurance attractive is usually the cash value that can grow over time. When you pay your premiums, a universal life insurance policy has the opportunity to collect a cash value.
In a universal policy, it earns the cash value of interest at the maximum of the current market rate or a minimum interest rate determined by the policy. This means that the cash value has less growth potential than in a variable life insurance where the cash value is placed on the market, but possibly greater security due to the policy's minimum price.
Unlike a whole life insurance, which has fixed premiums over the life of the policy, universal life insurance offers flexible premiums. If there is enough cash value, the policyholders can use that value to fully or partially cover their monthly premiums. They also have the opportunity to pay more than their standard premium to strengthen the cash value of their account.
If this flexibility seems attractive, remember that flexibility inevitably goes both ways.
Contract premiums for universal life insurance typically remain the same over the lifetime of politics. If a customer uses the cash value to help pay the premium and the cash value is reduced, the difference between the cash value and the death benefit is higher than expected and will ultimately require the customer to pay higher premiums than planned. It can mean higher ̵
Universal life insurance has three key components: premiums, death benefits and cash value.
The premium is what you pay for your policy each month. Universal life insurance premiums are divided between the cost of coverage – the amount to keep your life insurance coverage and the cash value. Each month, you can decide how much you want to pay as long as it is between your police's minimum and maximum payment.
You can use the cash value to pay premiums once you have built up enough. However, if your cash value expires, or if interest rates do not allow it to stick to the increased cost of insurance over time, you may end up due to higher payments. And since the cash value is normally equal to the handover value, it cannot lead to double losses – no longer life insurance coverage and no surrender value for the overdue policy, even after years of payments.
The death benefit is your life insurance amount and how much your recipient will receive when you pass. Universal life policyholders often have the opportunity to increase or decrease their coverage amounts based on their needs.
Regarding the cash value, the savings account, every time you pay a premium payment, is divided into your insurance cost amount to keep your death benefit active and cover administrative fees) and the rest is placed in your cash value account.
With universal life insurance, cash value is guaranteed to grow at a minimum annual interest rate, but it has the potential to increase faster based on market interest rates. If the cash value grows, it can be used as a loan guarantee if you want to borrow from your policy or used to cover premium payments.
If you decide that you no longer want your universal life insurance, you can hand it over to the insurer and get the cash value in return.
Disadvantages of Universal Life Insurance
Universal life insurance is a type of life insurance that combines permanent life insurance with a cash value component and some flexibility around premiums and coverage levels.
For some, the benefits seem attractive.
- Premiums and death benefits are flexible. If you want to contribute less to your policy for a certain month, you can, as long as your payment is above the minimum threshold. And if your insurance needs change over time, you can often adjust your death benefit.
- You get life insurance for your entire life. Your heir will receive a death benefit, regardless of when you pass, as long as your premiums are paid.
- Lower costs are permanent insurance than whole life. Universal life insurance guarantees a minimum return over time, but returns are often lower than the fixed life insurance value of cash. This means that premiums for universal life insurance are generally cheaper than premiums for whole life insurance. And in high-interest environments, your cash value can grow faster with a universal life insurance than your entire life.
Universal life insurance comes with some drawbacks you should consider.
- Premiums are expensive. While universal life insurance premiums are generally less expensive than the entire life insurance policy, they will always be much more expensive than the policies of a policy of maturity. A $ 500,000 universal life insurance policy for a 40-year-old man with excellent health can be $ 249.50 a month, compared to $ 32.38 for a 20-year vacation policy.
- Your insurance cost is not determined. Universal life insurance premiums are divided between the cost of insurance cover and the cash value. But as you age, the cost of insurance increases in most policies, up to a maximum amount set at the beginning of the policy. Reducing your cash value can mean much higher premium payments later in life or even the loss of your policy.
- Loans will come with interest. Interest will be charged on any loan amount. Unpaid loans and interest will reduce the cash value of the policy and the death benefit.
Many people with a conservative risk tolerance will use a universal life insurance policy to raise money on tax deductions, especially if they have a life insurance requirement. But for people who need coverage for a certain period, they can buy cheap life insurance.
Life Insurance as an Alternative to Universal Life Insurance
If your primary goal is to protect your loved ones with life insurance when you need it most – while your children or young people or you are still early in your pension savings – life is often a cheaper and more efficient choice.
Get the coverage you need when you need it and at much lower cost with maturity insurance. The premium savings can be set against your other goals and investments so you can build the future you want.
Chelsea Brennan is the founder of Smart Money Mamas, a personal finance blog that focuses on family finance, investment and reducing money stress. Chelsea is an ex-hedge fund investor whose work has arisen in a wide range of publications, including Forbes, Business Insider and more.
Haven Term is a life insurance policy (ICC17DTC) issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111 and offered exclusively by the Haven Life Insurance Agency, LLC. The number and features of policies and riders may vary by state and may not be available in all states. In New York, Haven Term DTC-NY is 1017. Our license number in California is OK71922 and in Arkansas, 100139527.