There are many talks these days about life insurance and what it can do for you. But what is it, exactly? Life insurance can provide peace of mind knowing that your loved ones will be taken care of financially if something happens to you.
Are you looking for a life insurance policy that you can tailor to meet your specific needs? You may want to consider buying a universal life insurance policy. Universal life insurance is form of permanent life insurance policy that offers flexible premiums, death benefits, and cash value accumulation.
Unlike other types of life insurance policies, insurance companies in Canada offer universal life insurance policies to allow you to tailor the coverage to fit your needs. This makes it an excellent option for people who want more flexibility with their coverage.
This blog post discusses what universal life insurance is and how it works, its pros and cons, and how it is different from other types of permanent life insurance.
So if you’re interested in learning more about this type of coverage, keep reading. We’ll break everything down for you!
What is Universal Life Insurance?
Universal life insurance is a type of permanent life insurance that offers lifelong coverage, flexibility, and cash value accumulation. With universal life, you can choose how much life insurance coverage you need and how much you want to contribute to the cash value account.
Universal life insurance policies typically have two main features: death benefit protection and cash value accumulation. The death benefit is the money your beneficiaries will receive if you die while the policy is in force.
The cash value accumulation feature allows you to save money within the policy, which can grow tax-deferred over time. You can use the cash value for various purposes, such as supplementing your retirement income or paying for long-term care expenses.
How Does Universal Life Insurance Work?
Universal life insurance is a form of permanent life insurance policy, which means it will cover you for your entire life as long as you continue to pay your premiums. It offers the policyholder flexibility in how their premiums are paid and the death benefit payout.
The policyholder can also choose to increase or decrease their premiums and the death benefit payout. This makes universal life insurance an attractive option for those who want more control over their life insurance policy.
Universal life insurance is usually more expensive than term life insurance but cheaper than other types of permanent life insurance. Some insurance company allows you to increase or decrease your premiums within a specific limit. The extras go into a built-in savings account when you pay premiums over the minimum amount.
Universal life insurance allows you to invest and build wealth within your insurance policy. Your premium payments are separated into two portions. One part goes into your lifelong insurance coverage, and the other goes into investing.
When you make monthly or annual premium payments, the insurance company deducts a portion for the cost of insurance and administrative expenses. The remaining premiums are deposited into an investment account where it earns tax-deferred interest.
The insurer allows you to pick your investment options, but your cash value grows at a minimum rate set by them. If the market performs well, your cash value grows faster. And when it grows, you can withdraw from, borrow against, or use it to pay for future premiums.
Types of Universal Life Insurance
There are three types of universal life insurance—each with its pros and cons. You should consider each before you make a decision on which universal life insurance you buy.
Indexed Universal Life Insurance
Indexed universal life insurance links the cash value growth to the performance of a stock index. The insurer invests in one or more indexes, such as S&P/TSX, and pays the interest into your cash value account based on how the index performs.
If the stock index performs well, the cash value grows faster. However, you can only receive interest at the rate set by your insurer. Sometimes, you get a rate lower than the index performance because the insurer has taken a bigger slice.
If the market does not perform up to the mark, you earn less and may have to pay higher premiums to keep your policy active. You must closely monitor your policy’s cash value to ensure your policy doesn’t lapse if it doesn’t have enough cash value to cover premiums.
No-Lapse Guarantee Universal Life Insurance
No lapse guarantee universal life insurance allows your premiums to remain the same regardless of how the index market performs. In this case, your coverage isn’t linked to the market performance.
The policy comes with a no-lapse guarantee, which means your policy won’t lapse as long as you pay your premiums. Your premiums and death benefit don’t change. You have to stay up to date with your premium payment because missing one can lapse your policy.
Variable Universal Life Insurance
Variable universal life insurance allows you to adjust your premiums and death benefits. You can invest your cash value in different funds offered by the insurance company according to your financial needs, risk tolerance, and investment goals.
If the market performs well, you get handsome returns that you can take out or use to pay future premiums. However, there is an element of risk involved that you should consider; you cannot predict how the market will perform.
Benefits and Downsides of Universal Life Insurance
Like every other life insurance plan, there are also pros and cons of universal life insurance. The benefits of universal life insurance makes it a perfect option. Universal life insurance offers policyholders seeking flexibility and greater control over their life insurance policy.
Pros
- Affordability: Universal life insurance is more affordable than whole life insurance. Premiums are lower because you get to manage the cash value account. It requires more of your involvement in the running of your policy.
- Adjustable death benefit: Universal life insurance allows you to increase or decrease your policy’s death benefit. Suppose, after 20 years of buying your policy, you discover that you don’t need as much coverage as you initially applied for. In that case, you can reduce the death benefit amount. However, if you need more, you can also increase the death benefit, though you might undergo a medical exam first.
- Flexible premium payment options: Universal life insurance does not have a fixed premium amount. Instead, you select how much you want to pay and when you pay it. You can pay extra premiums if you want to increase your policy’s cash value. Also, you can use your cash value to pay premiums when your financial situation is not good.
- A broad range of investment options: Universal life insurance offers many investment options. You can choose how your money is invested according to your long-term financial goals, investment style, and risk tolerance.
Cons
- Uncertain returns: Universal life insurance policies offer interest on cash value, but there is no guarantee of returns on investments. Your interest rate or investment return may reduce or turn negative due to market downturns or a decline in interest rates.
- Constant monitoring: With universal life insurance, you must closely monitor your policy to ensure that you have adequate cash value to pay premiums. Universal life insurance returns are uncertain, and the policy expenses increase with age. The costs can take out all your cash value and cause your policy to lapse.
- Fees: Universal life insurance comes with many fees hidden in its structure. You can be charged for requesting cash withdrawals, taking loans from your policy, making changes to your investment options, or even terminating your policy.
- Complexity: Universal life insurance is a complex insurance product. You are responsible for managing the account value and returns. The policy’s flexibility also creates a high degree of uncertainty because the death benefit and cash value are not guaranteed.
Universal Life Insurance Vs Whole Life Insurance
Universal life insurance and whole life insurance are similar in some ways. Both types of permanent life insurance offer lifelong coverage, grow cash value on a tax-deferred basis, and allow you to withdraw or borrow against the cash value.
However, whole life insurance is more expensive than universal life insurance. Whole life insurance offers guaranteed premiums and death benefits that are predetermined at the start of the policy and cannot be changed.
Some whole life insurance allows you to earn dividends from your insurance policy. This type of whole life insurance is called participating whole life insurance.
How Much Does Universal Life Insurance Cost?
Life insurance is an essential financial tool that can provide peace of mind in the event of an unexpected death. Your beneficiaries can also use it to cover expenses, such as medical bills and funeral costs. But how much does life insurance cost?
There is no one-size-fits-all answer to how much universal life insurance costs. Your premium depends on several factors, including your age, health, coverage amount, gender, family medical history, smoking status, occupation, hobbies, lifestyle, and life expectancy.
Generally, universal life insurance premiums are significantly higher than term life insurance premiums. This is because universal life insurance provides lifelong coverage, whereas term life insurance only covers you for a specific period of time.
Universal life insurance is a good option to consider if you are looking for coverage that will last your entire life. However, you should be prepared to pay a higher premium than you would for term life insurance. Shopping around and comparing rates from different companies before purchasing is important.
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Final Thoughts on Universal Life Insurance
Universal life insurance is the best option if you are looking for a life insurance policy that will provide coverage no matter what happens.
This policy offers flexibility and peace of mind, making it a valuable investment for anyone who wants to protect their loved ones. It offers permanent coverage and can be tailored to fit your specific needs.
Speak to an expert insurance advisor if you need guidance on buying universal life insurance and how it can benefit you and your family.
Hi, I'm Adeola Adegoke. I am a licensed Insurance Broker in Manitoba, and I hold a master’s degree in Mathematical Sciences (with a major in Financial Modeling) from the African Institute for Mathematical Sciences (AIMS), Tanzania.
Also, I have a second master's degree in Statistics from the University of Regina, and I am currently pursuing my Ph.D. in Statistics at the University of Manitoba.
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