Why universal life is the best option when planning for your future.

So far we have looked at both term life and whole life, now we are going to dive into a second type of permanent life insurance, Universal Life.  Just like whole life and variable life, universal life insurance is permanent protection; that means that once we make our first premium payment, so long we continue making payments, our policy will remain active.  Universal life also builds up a cash value, but its going to be a little bit different than how it worked with the whole life policy.

Universal Life, or UL, is called that because of how flexible it is.  It can be tailored to fit do just about what ever you want it to.  It is almost a one-size-fits all policy, universal if you will.

How does a UL work?

Just like all other insurance policies, life or other, part of the premiums are for the cost of the insurance (COI).  This is the portion that pays the administration and cost of keeping the lights on, things like that.  As we get older, our cost of insurance goes up; this is for everyone, its just how insurance works.

Now the remaining part of of the premium, at least when talking about permanent life insurance, goes to the cash value.  The fun part about a UL is that we can adjust our monthly premiums to in increase the cash value right in the beginning when our COI is low.  This is called over funding.

The investment part of a UL

I have already said a coupe times that I do not like looking at life insurance as an investment, and this is still true.  There just isn’t a better way to word how this money grows.

When we pay insurance companies premiums, that money has to go into one giant bank account.  That amount of money in that account must at all times be enough to cover a certain percentage of potential claims.  This is good for us as consumers, because it means that the company will remain solvent and we will be paid when we file a claim.  It hurts the potential growth of that money though, because the insurance company isn’t allowed to invest that money in to something that would lose a lot of money.

With a term life insurance policy, the insurance company takes a gamble on you not dyeing.  If you do die, they lose money.  If you life they make some money.  With a whole life, they know you will die, they just need to charge you enough to make sure that if you die early, they aren’t losing too much money.  With a universal life, they are investing part of your premium into the stock market.  This allows the insurance company to offer the consumer interest rates on their cash value to help grow it faster.  These interest rates do fluctuate, and they are not always guaranteed, but they do have a minimum return that they will make, even if the company itself loses money.

This is how we are able to increase our cash value so quickly with a UL, through overfunding it in the initial years and allowing our cash value to increase drastically before our COI goes up as we age.

This should NOT be confused with an Indexed Universal Life.  Those are similar, but they are invested differently and carry significant amounts of risk for the policy owner.

Advantages of a UL vs whole life

So if we shouldn’t be using life insurance as an investment, and only need $15,000-$20,000 for our final expenses, why bother with a UL at all?  Because they can do some pretty cool things.

Flexible Death Benefits

Most companies will start their death benefits on a UL at around $30-$50k.  If you’re still young and healthy (think 40s) you can get a $40,000 UL for about $45-50 a month.

But what if your only 20 and you can’t afford a lot right now, but you decide to purchase a policy anyways.  10 years later you have a wife, house, and two kids.  Your needs have changed.  A UL can offer you the option to increase your death benefit, essentially adjusting the policy to fit your changing life needs.

This isn’t always as easy as making a phone call.  Sometimes you will need to be seen by a doctor first, and your premium payments will undoubtedly increase, but the option is there.

Flexible Premiums

We talked about how you can overfund a UL policy.  You can also underfund one.  Most permanent life insurance policies will use the cash value to pay the premiums if you miss one, and this is a pretty standard practice. 

With a UL its a little different.  Because we earning interest on our cash value, if we have enough of it, we can afford to send a little bit less in as a premium payment, or maybe even skip a payment or three.  So long we keep a positive cash value, our policy will not lapse.

Now, this can get pretty bad pretty quickly, so always make sure to know what you’re doing if you decide to do this (ask for a force illustration before making any changes).  If the policy does happen to run out of cash value, you’ll receive a call from the insurance company asking you to either make a giant lump sum payment, or close the policy.  Since you don’t have a cash value at this point, you would not receive anything from closing it.

Potentially increased cash value

Again, because we can overfund the UL, we can really turbocharge the cash value in the first 10-15 years.  If interest rates remain high, this is even more beneficial for us.  This allows us to surrender part of the cash value if we just want to take a lump sum, or lower our premiums for a while.

What you do need to be careful of is having too much cash value and then dying.  When we finally die, the insurance company pays us the death benefit.  They keep the cash value.  So if you have been overfunding a policy for years and are sitting on a really big cash value, when you die that money is gone.  Your loved ones will still get the face value of the policy, but it does sting a little to lose money like that.

But, cash value increases are never a guarantee.  Because our money is tied to an interest rate, it may underperform.  If it does, there is a minimum amount that we will see returned, but it wont be great.   On the other hand, if the markets do great, you’ll only see the promised rates, the company will not pass along any of their profits to you.

SOOO many riders

I love riders.  They let you do just about anything you want.  Worried about long term care and how you’re going to afford it (you should be…), there is a rider for that.  Want term life on top of your UL?  There is a rider for that.  Want to add your kids to your policy now, and then spin their policy off into a stand alone policy?  That’s a rider.

Honestly, if you want it, someone probably has it to sell.  It just comes at a cost.

What's the biggest advantage of a UL?

The customizability combined with the potential for great growth without the vulnerability of an Indexed or Variable life product.  The really are great products, which is why I think they are the best type of life insurance.

On the other hand, they require a watchful eye.  You need to pay attention to your policy and make sure you are putting enough towards the cash value.

Takaways

If you’re still young (under 65) and are looking for a way to set money aside for your final expenses, look into a UL.  They pack such a larger punch than a traditional whole life while still offering a decent amount of potential growth without unchecked liability.

Give us a call if you want to know more.

Aaron
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