Universal Life Insurance: Is it Really Worth it?
If you are reading this, the chances are you have questions on universal life insurance (UL). Often regarded as the “thinking person’s life insurance policy,” IUL is effectively an amalgamation between a term life insurance policy and a cash value account. What this means to the layman is that – aside from holding policy documents on a life insurance policy – an individual can also borrow money at a tax-free rate to pay for items, which include, but are not restricted to, retirement expenses.
When we examine a whole life policy, we can identify how any insurance company uses the dividend rate. How this applies to policy holders is that – when the announced rate is taken into account – this will be multiplied by the cash value of a policy. This is then added to your personal cash value. IUL insurance, therefore, is a very attractive option to those who want the best of both worlds, so to speak. While things may appear too good to be true, and this policy is maligned by some, there are notable pros and cons to IULs.
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It is important to understand the methodology in how this policy works against traditional insurance policies. For example, an insurance company have the power to set the announced rate on whole life policies. This is based on a number of factors such as:
- Surrender fees
- Portfolio returns
- Additional funds accrued from underestimated actuary projections
In contrast, IULs cash value is worked out via a formula rather than at the behest of an insurance company. As such, the formula will be linked to stock market performance.
How can this affect me?
In order to truly understand how the policy works, you need to read the terms, conditions, exclusions and limitations set out in the policy document. While things may appear to work one way, expectations can often be misleading. When the stock market drops, you should expect a guarantee of a 0-3% return, regardless. When value goes up, you have the opportunity to shoot for a larger return.
How Can I Tell if This Works for me?
To an insurance company, the premise of offering affordable premiums on a level term policy generally taken out by those at an average age of 28 is profitable. This is because premiums offered to a healthy, younger professional over a period of 30 years will generally come with little risk. If you are unhealthy, premiums are loaded to protect the company against your death.
However, as there are said to be two certainties in life – death and taxes – the inevitably of everyone owning a policy dying makes for a situation where the company must be strong enough to pay out to those covered. In IULs, the death benefit is the expensive part of the coverage. On this basis, the value of premium payment will not end up in your cash value balance.
Is it the Right Choice?
As we have only covered the absolute basics of this type of policy and it how it works, it would be unethical to suggest it is the right choice for anyone. This decision should only be made after careful consideration of your own circumstances.