Universal Life Insurance
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Why Do I Need Universal Life Insurance?
A standard universal life insurance policy’s cash value grows according to the performance of the insurer’s portfolio and can be used to pay premiums.
Compared to most life insurance products, Universal life insurance is the most flexible. It is suitable to your changing needs which allows you to adjust the amount of insurance you own along with the level of premiums you pay.
This type of life insurance offers benefits throughout your lifetime as well which includes – and are not limited to household expenses, home modifications, nursing home expenses, and regular bills.
What Else Should I Know About Universal Life Insurance?
With universal life insurance, you pay a monthly fee that splits into two parts: One covers life insurance and the other goes into savings and investment.
It’s meant to be more flexible by allowing you, the policy holder, to choose how much premium you pay within a certain range. The minimum amount is set by the cost of insurance, which includes your death benefit and administrative fees.
Anything you pay over this premium is added to your cash value, which is guaranteed to grow according to a minimum annual interest rate set by the insurance company (though it can grow faster depending on how well the market is doing).
Many people choose to pay the maximum premium possible, which is set by the IRS, in the early years so they can build a larger cash value (and then use that cash to cover premiums later in life). But this is a risky move since the cost of insurance will increase the older you get! Question is, will you have enough cash value to cover it?
Types of Universal Life Insurance
Universal life insurance can get complicated as you get into the subject. In fact, there are three types to choose from. The three types include:
Indexed Universal Life
For anyone with an indexed universal life insurance plan, the cash value is linked to indexes. So, if the market is doing well, the cash value will go up. But there is a catch – the rate will always be a little lower than the performance of the index because the insurance company will take their hefty share. And if the market is not doing well—you guessed it—the value will drop. This will impact your premiums for better or for worse.
Guaranteed Universal Life
If you don’t like the idea of having your premiums tied to market performance, the insurance agent may try to sell you guaranteed universal life insurance instead. With these policies, your premiums stay the same regardless of how well the index performs because the interest rates are set from the very beginning of the policy.
And it has a “no-lapse” guarantee (hence the name), so as long as you send in your premium check, you’ll have coverage for the rest of your life. This is the least risky universal life policy.
But here’s the catch. Since your premiums don’t adjust based on market performance, there’s hardly any cash value in it. That’s because this policy isn’t really designed to build cash. It’s too busy trying to keep up with the cost of insurance.
Variable Universal Life
This life insurance policy lets you invest the cash value part into a mutual fund. A mutual fund is a pool of money managed by a team of investment pros. Your cash value makes up part of that pool, and it’s invested into lots of different companies at once. Don’t get us wrong.
Mutual funds are a fantastic way to invest because they diversify your risk (that’s just fancy Wall Street talk for making sure you aren’t putting all your investment eggs in one basket). But remember, life insurance is meant support your loved ones once your pass, not for investing. Those massive fees will take a major bite out of your earnings.
As we’ll show you, it doesn’t matter which of these you choose. All three policies come with killer fees. And if you want the best bang for your buck, you won’t invest in cash value. Stick with investments outside of life insurance.
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