What are the Pros and Cons of Universal Life Insurance
With so many life insurance plans available, it's hard to know which is right for you. Here we break down the pros and cons of universal life insurance.
Are you thinking about purchasing universal life insurance?
Universal life insurance is still permanent life insurance. It differs from whole life insurance by what happens to the premium you pay.
When you pay your universal insurance premium, part of it pays the cost of the life insurance while part of it goes into your cash value savings account.
There are many reasons why universal insurance may be a better choice for you if you are shopping for life insurance plans.
Read on to learn more about the pros and cons of this form of insurance so you can make an informed decision.
Pro: Flexible Premium Rates
This is the biggest benefit when it comes to investing in universal life insurance. With a universal plan, you don't have to pay a fixed premium price per month.
Well, you can. But you don't have to. You can pay minimum premium payment rates during times when finances feel a bit tight, and larger ones when you're feeling comfy.
If you pay larger premium payments, the excess you've paid goes straight into your cash value. Think of your cash value as a Roth IRA--it's like a savings account that accrues interest over time.
You can later draw on this cash value to pay life insurance premiums.
Flexible premium rates are ideal for people who don't want to commit to paying the same premium price per month, or want to get a head start and fill up their cash value.
Con: It Can Be Expensive
Wait a minute, you might be thinking. Didn't you just say that universal insurance rates are flexible?
This is still the case. But premium prices at their minimums are in general much more expensive than whole life insurance premiums. This is the case because it is still a form of permanent life insurance, and there are some additional fees involved.
What's more, premium rates are likely to increase per year, especially if you are starting a plan at age 30 or 40.
It's best to talk to an insurance representative to get an idea of whether or not a plan is worth the expense. You may want to consider a guaranteed universal insurance plan, for example, which can cost you a fifth of the price per month.
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Pro: You've Got a Lot of Choices
Flexible premium payments aren't the only benefit of universal insurance. You also have a lot of freedom to play your cards right with this plan when it comes to the interest you accrue.
One such option involves getting an indexed universal plan. Basically, when you pay your premiums of an indexed plan, part of it can go towards what's called an "interest crediting strategy."
You can choose the type of strategy you want.
One of these, called the equity indexed strategy, lets you take part pretty much risk-free in a leading stock--like the Dow Jones or Russell 2000. There may be a cap on how much you can participate, and the amount of interest you can accrue.
If this sounds a bit scary, don't worry. You can just opt for a straight up accumulation of interest in your cash value account at a standard interest rate--which is still a great option.
Con: You've Got to Pay Attention
The premiums you pay for a universal plan aren't like a cell phone bill that you can set on autopay.
Well, you can set payments up to be deducted automatically but this may not be useful if you want to pay different premium prices per month.
A universal plan will involve a lot of attention and careful planning. It's important to stay on top of how much cash value you have so you can keep your eyes on the future.
It's also important to keep records of what you're paying per month. If your insurance company deducts from your cash value account to make a premium payment, you'll want to make sure you know the remaining balance.
It's easy to keep track of all of this through online portals, but some people may not want to be this invested in their plans.
Pro: Pay Now So You Don't Have to Later
A lot of people who are thinking about getting life insurance at a younger age don't like the idea of paying premium bills when they're 75.
The benefit of universal insurance means that you can essentially pay off your life insurance before you're even 60. You can 'overpay' premiums and build your cash value so that you will have enough value to pay premiums until your death.
This is ideal for people who want to get these costs over with and enjoy a retirement without all those bills.
Con: The Cash Value Can Be Deceiving
Many people are attracted to the built-in cash value aspect of universal life insurance--for good reason!
But this can actually be a bit deceiving. Interest rates for cash value accounts aren't necessarily out of this world. In fact, they can be on the lower end.
You also can withdraw from your cash value whenever you want to pay premiums. You can also withdraw against a low balance, kind of like a credit system, to pay your monthly rates.
In this latter instance, you'll still have to pay the company back. But you'll have to do so with interest.
These limitations on cash value can be a huge disadvantage for people seeking a flexible and lucrative insurance plan.
Universal Life Insurance: Final Thoughts
At the end of the day, universal life insurance is ideal for people who are looking for a financially flexible plan. If you've had experience with a health care plan that has a built-in savings account and loved it, then universal is right for you.
It is also ideal for people who are willing to stay on top of their cash value total, premium payments, and interest rates. In this sense, universal insurance isn't something you can just forget about.
People who are wary of expensive premiums and low-interest rates may want to pass on universal insurance. They may want to consider another option, like term life insurance.
The best way to decide whether universal life insurance is right for you is to talk to an insurance representative or get a free quote.
At Insurdinary, we make it easy for you to find the life insurance you need. Browse our Canada plans today so you can get the lowest premiums out there!