Any insurance policy is an investment in the future. It plays a key role in the financial planning of an individual. A universal insurance policy offers both insurance coverage and a cash value that grows over time, making it an attractive option for long-term investors. However, like any investment, there are potential risks and drawbacks to consider before making a decision. Is a universal life insurance policy a good investment? Here are the pros and cons of investing in a universal life insurance policy, and discuss factors to consider before buying one.
What is a universal life insurance policy?
A universal life insurance policy will cover you for your entire life. However, the policy must remain in force, and you must pay the premiums. In addition to lifetime coverage, universal life insurance has a cash value component.
Apart from the cash value that grows with your policy, this insurance’s flexibility in premium payments makes it bankable. For example, suppose you are facing a sudden financial crisis. In that case, the universal policy allows you to pay less or skip a premium based on the cash value amount and the interest rates.
Benefits of Universal Life Insurance Policy
- Flexibility in premiums.
- Death benefits can be adjusted.
- Cash value growth
- Choice of investment options like stocks, bonds, or mutual funds.
- Addition of riders to the policy.
Types of Universal Life Insurance Policy
You can choose from these major types of universal life insurance policies.
Indexed Universal Life Insurance
Indexed universal life insurance (IUL) provides lifelong coverage with some death benefits and premium flexibility if your needs or budget change; your death benefit and payments may be adjusted within limits.
IUL cash value is often tied to a stock markets index like the Nasdaq-100, S&P 500, or a combination of indexes. In addition, you can consider fixed-interest investments.
Variable Universal Life Insurance
This policy lets policyholders put their money into stocks, bonds, or mutual funds. However, the associated risk factor is the dependency of the returns on the performance of the chosen investment option.
Guaranteed Universal Life Insurance
Guaranteed universal life insurance (GUL) provides a lifetime death benefit and fixed premiums. These policies often have a pre-selected end date, even though they’re permanent life insurance. The policy will stay active until the policyholder’s chosen age. However, these policies may not have cash value.
This can be an option for those who require lifelong coverage and are not focused on the cash value investment component.
Do I need a universal life insurance policy?
Weighing the benefits and disadvantages is crucial in determining your need for a universal life insurance policy. While flexibility, accumulative cash value, and higher returns are the perks of UL insurance, the higher premium rates, the additional charges, and the uncertainty of the market rate are the downsides of this kind of policy.
Therefore, you must choose the policy if it aligns with your financial goals. For example, suppose your income covers mortgage, car payments, and your children’s education.
In that case, your financial goal is to provide financial security for your family in case of a financial setback that might happen to you or your family. It will provide death benefits based on your requirements, cash value that can add to your savings, and payment of premiums based on your financial situation.
Checklist before buying a universal insurance policy
- Calculate your insurance needs and consider how much coverage you need, how long you need it, and who you want to be your beneficiaries.
- Read the policy document carefully and understand the terms and conditions of the policy, including fees, charges, and potential risks.
- Compare policies from different insurance companies to find the one that best meets your needs and budget.
- Understand the investment options offered by the policy and evaluate their performance, risks, and fees.
- Assess whether the policy aligns with your financial goals and risk tolerance.
- Research and evaluate the financial strength and stability of the insurance company to ensure they can meet their financial obligations.
- Consult a financial advisor who can help you make an informed decision.
- Review your policy regularly to ensure it still meets your needs and makes any necessary adjustments
Is a universal life insurance policy a good investment?
A universal life insurance policy combines life insurance and an investment component. The cash value grows tax-deferred. In other words, you don’t pay taxes on growth until you withdraw money from the policy. The policy’s cash value can also be borrowed.
In addition, to the complexity of these kinds of policies, they have additional charges which can even eat your returns. Though it offers an investment option, it might not be as diverse as it is in the market.