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Universal Life Insurance Pros and Cons
What are the biggest universal life insurance pros and cons? We’ll go over them in detail here. If you want, you can skip straight to a pro or con below:
- Pro #1: Flexible payments
- Pro #2: Flexible death benefit
- Pro #3: Builds cash value
- Pro #4: Policy types that can increase cash value growth
- Pro #5: One type (GUL) is a good option for seniors
- Con #1: Costs more than term life insurance
- Con #2: You’re responsible for managing payment dates & amounts
- Con #3: Cash value growth may be subject to slow growth or even loss, depending on your policy
But First…What Is Universal Life Insurance?
Universal life insurance is designed to cover you for your entire life. When you get a quote for a policy, you’ll choose the age at which your coverage matures – 95, 100, or 120, for example.
If you pass away before that time, your chosen beneficiaries will receive the tax-free death benefit payout.
If you’re still alive when the policy matures, you will receive the payout. At that point, it would be up to you to leave that money to whoever you want in a will.
Now, let’s get to those universal life insurance pros and cons.
Universal Life Insurance: Pros
Pro #1: Flexible payments
No other type of permanent life insurance offers flexible payments. There’s a minimum premium suggested, but you can pay more or less than your minimum. When it comes to universal life insurance pros and cons, this is the biggest “pro” that really makes universal life unique.
- Why would you pay more? To grow your cash value faster. It’s also ideal for clients with variable incomes – freelancers and seasonal workers, for example. If you have the money now, you can pay ahead so that when times are lean, you’ve already met your policy’s minimum obligations.
- Why would you pay less? If your income varies, this flexibility ensures you can keep your coverage even if you can’t make the minimum payment at that time. As long as you manage those payments to ensure the minimum payment threshold is met, you can pay how and when you like. If your account has grown enough cash value, you can also use cash value to make your payments.
Want to talk to a real person about your options? Call us at (800) 521-7873! We’re happy to help.
Pro #2: Flexible death benefit
The whole point of life insurance is to cover your financial obligations – a mortgage, debt, or the cost of raising a family. As you age, chances are these financial obligations will decrease. Makes sense, right?
If you need less coverage at age 60 than you did at age 30, many insurers will let you adjust your death benefit accordingly. Adjusting the death benefit downward will also lower the cost of your coverage, decreasing minimum required payments.
Have questions only a real person can answer? Call us at (800) 521-7873! We’re happy to help.
Pro #3: Builds cash value
When you make a payment, the insurer takes out the cost of your coverage and any administrative fees. The rest is deposited in your cash value account, which earns interest at a rate specified when you purchased your policy. Over time, this cash value will grow.
Later, you can access that cash value through policy loans and withdrawals. There are no restrictions on what you can do with this money. We’ve had clients use it for retirement income, a child’s college tuition, home improvements, and more. When it comes to universal life insurance pros and cons, this is another big “pro.”
- Want to leave the cash value to your beneficiary? Choose what we call an “increasing death benefit.” This means your cash value is added to the total of the death benefit before it’s paid out to your beneficiaries. This costs more than the next option below.
- Want to spend all your cash value in your lifetime? Choose what we call a “level death benefit.” This is the most affordable option, with no price increase – but be aware that your cash value is “use it or lose it.” If you pass away with $50,000 cash value, for example, a level death benefit policy will not pay that out to your beneficiaries. It’s up to you to monitor and spend it accordingly.
Have questions about cash value? Call us at (800) 521-7873! We’re happy to help.
Pro #4: Policy types that can increase cash value growth
There are two types of universal life insurance that give you a little more control over how your cash value grows: variable universal life (VUL) and indexed universal life (IUL).
- VUL: Your cash value can be split up among several subaccounts. You can then choose different investment options for each subaccount. There’s also a subaccount that grows with a fixed interest rate, which can act as a hedge against any of your invested subaccounts. Because your subaccounts contain actual investments, there’s the potential to grow more cash value – but also to lose some, too. When it comes to universal life insurance pros and cons, this could be a pro or a con, depending on your risk tolerance.
- IUL: Tie the growth of your cash value to the performance of a particular stock index, such as the S&P 500. The index does well? The insurer credits your account with more interest. The index does poorly? The guaranteed minimum interest rate will protect you against losing any cash – but you won’t grow your current cash value very quickly, either. Keep in mind that you aren’t actually invested in any stock or fund; you’re simply using its performance to earn more or less interest.
Need a little advice from a real person about your insurance options? Call us at (800) 521-7873! We’re happy to help.
Pro #5: One type (GUL) is a good option for seniors
Guaranteed universal life (GUL) works really well for seniors. It’s often described as a halfway point between term life and other types of permanent life. That’s because it’s more affordable than whole life insurance but lasts longer than a term policy. When it comes to universal life insurance pros and cons, GUL has two big pros: lasting coverage and affordability.
What makes GUL different from other types of universal policies?
- The premium payments don’t change over time. They’re set when you buy the policy and don’t change.
- It offers little to no cash value, which means there’s less chance to build wealth but also less market risk than other universal policies.
- It’s more affordable because of the minimal cash value and lack of management fees.
- For people age 60+, it’s often more affordable than term life coverage.
If you’re over 60 and shopping for coverage, check out our post on term life insurance for seniors. Or call us at (800) 521-7873 and let’s see if a guaranteed universal life policy could be cheaper than a new term policy!
Universal Life Insurance: Cons
Con #1: Costs more than term life insurance
Because of benefits including lifelong coverage and flexibility, universal life costs more than term life insurance. Term life is cheaper because it doesn’t grow cash value, and it has a fixed expiration date.
On average, term life can be 5-10 times cheaper than a whole or universal life policy. If you’re considering permanent coverage, be aware of the benefits but also of the added cost.
Need a little refresher on what the difference is between term and permanent policies? Check out our term vs. permanent post here.
Con #2: You’re responsible for managing payment dates & amounts
It’s like they said in Spider-Man: With great power comes great responsibility. It’s on you to ensure your policy is funded with at least the amount required by your minimum payments.
In your policy’s early years, if you make a mistake and forget to pay, your policy could lapse. If a policy lapses, that means there’s no longer coverage in place and there’s no death benefit.
In your policy’s later years, when you have enough cash value to use for payments, it’s possible that you could run through the cash value before you pass away. It would then be your responsibility to make payments again to keep the policy funded.
Need a little help evaluating these universal life insurance pros and cons? Give us a call at (800) 521-7873! We’re happy to go over your options with you.
Con #3: Cash value may grow slowly or be subject to loss, depending on your policy
Universal life’s cash value growth is tied to market growth (with IUL) or your invested subaccounts (with VUL). Here are the risks associated with these specific policy types:
- IUL: With IUL, you’re protected against loss – but you’re not guaranteed much growth. If your insurer offers a minimum amount of interest as a default, that’s nice to have, but it may not be much more than you’d get from a savings account. The real benefit of IUL comes when the index your cash value is tied to does well. But if we have an extended bear market period or period of low interest rates, your cash value may not grow as quickly as, say, a managed diversified portfolio of stocks, bonds, and other investments.
- VUL: With VUL, your subaccounts are actually invested. That means you’re risking that cash value to potential loss. Yes, you have the potential to grow your cash value faster based on your investment decisions, but you also run the risk of losing some, too. Of course, all investments come with some inherent risk, so those risks would be present if you put that money into the stock market, mutual funds, or other investment vehicle. Risk isn’t unique to VUL, but if you’re looking for a fail-safe return on your money, VUL cannot offer that.
As we mentioned in the “pro” section, the chance to earn more could be a pro or a con, depending on your tolerance for risk. Consider your financial and retirement goals, and compare other strategies to cash value returns to make an informed decision when it comes to universal life insurance pros and cons.
Want to talk to a real person about your options? Call us at (800) 521-7873! We’re happy to help.
