Life insurance is something that many people avoid thinking about or talking about, which is understandable. It can be hard and upsetting to work on preparing for your own death. However, making some uncomfortable choices and having a few hard conversations now can provide you and your family with an enormous amount of peace of mind, something that is truly invaluable to have.
You’re going to come across a lot of different terms when you start looking into life insurance, and universal life insurance is one of them. To find out what it means, what it can offer you, and how it’s different from other types of life insurance, keep reading!
What is Universal Life Insurance?
Universal life insurance is a type of permanent life insurance, which means it lasts from the time you set up your policy for the duration of your whole life, as opposed to term life insurance, which only provides coverage for a set period of time. Like all other types of life insurance, when you die, your universal life insurance policy pays a “death benefit” to your beneficiaries, usually family members, dependents, or loved ones.
Universal life insurance is similar to but not the same as whole life insurance. They are both types of permanent insurance, but the main difference between them is that whole life insurance has fixed premiums and a fixed death benefit, whereas the premiums and death benefit for universal life insurance are flexible and can be changed. Universal life insurance also has an investment savings element and is known for low premiums.
What are the Pros and Cons?
With a universal life insurance policy, part of each payment you make goes toward paying for the death benefit, while another part goes toward building up the policy’s cash value. The money accumulates over the years, and you can potentially withdraw or borrow against the cash value of the policy. This may reduce your death benefit, create a tax implication, or cause your policy to lapse, but this potential use is important for some people.
Universal life insurance policies are also known for their flexibility. In the event that the cash value of your account can cover the costs, you could be able to lower or stop paying your premiums for a finite amount of time. You do have to maintain a positive cash value, but this can be useful in situations where you’re looking to lower your monthly expenses. Universal life insurance can also have flexible death benefits. You can have the ongoing option to increase the amount that’s paid to your beneficiaries, or reduce it to reduce the cost of the policy. This can change your premiums, but the capacity for change is important to some people.
There are some downsides to universal life insurance as well. For one, it’s not a “set it and forget it” type of policy, and you really have to monitor your policy. Not paying attention to the value of your account can lead to it becoming underfunded, and you’ll need to make large payments to maintain your coverage. Your policy could also lapse, and you would have no life insurance.
With interest rates rising, universal life insurance also carries some more risks than others. If interest rates drop, your cash value account might not perform well. However, these policies often come with guaranteed minimum interest rates, so they will have a minimum amount that they won’t drop below if the market crashes. Additionally, even if your premium remains steady, the underlying cost of universal life insurance can rise as you age, and this can affect your cash value in later years.
Do I Need Universal Life Insurance?
If having a policy that’s adjustable is a priority for you when it comes to life insurance, then universal life insurance is definitely a good idea for you. However, if you don’t want to have to monitor your policy regularly and worry about your cash value and interest rates, whole life insurance might be a better choice for you.
If you’re interested in learning more about universal life insurance and whether or not it might be a good idea for you, contact YMI today! A member of our expert staff can help answer any of your questions.
