MONEY OBEDIENCE

back to the list of articles

Universal life insurance is a life insurance policy that combines life insurance with savings. In that sense this policy is like a whole life insurance policy. The premiums for universal life insurance are higher than for a term life insurance. The difference between the two payments goes into a savings or investment account. Over time you are accumulating a "cash balance" which will give you a certain yield depending on how this money is invested. As this savings account grows, it may yield sufficient returns to make premium payments on the life insurance portion of this policy permanently.

A universal life insurance policy can be set up in many different ways. For example, your premium payments may be flexible. In other words, you may not have to pay the full premium each year, but you are allowed to make lower payments if your cash situation does not allow you to contribute fully at some point in the future. However, the downside of this flexibility is that you may actually lose your life insurance coverage if your policy lapses due to insufficient funds.

Another possibility is that your universal life insurance policy allows you to allocate your investments yourself. You can instruct your insurance company to invest your funds in things like stock or bond funds. However, this also means that you assume the risk that your investments may not give you a good return.

A universal life insurance policy can be rather complicated. There are plenty of insurance agents who are happy to help you, since universal life insurance policies provide insurance agents with a good commission. So, beware! In most cases a universal life insurance policy may not be an appropriate choice, because the returns on your savings are usually much lower than the ones you could get elsewhere. In order to keep your life insurance policy in force you need to shell out a lot of money. If you do have the extra cash, it often is a better idea to invest the money in other places than a universal life insurance policy. Buying term life insurance is another option and it will most likely fulfill your insurance needs.

The fees you pay on a universal life insurance policy may amount to half of your first years' premium or even more, and to about 5% of all subsequent payments. An insurance agent gets to pocket (via his or her commission) a large percentage of these fees, which gives him or her an incentive to talk you into a universal life insurance policy. Your actual needs may not be as important to an insurance agent as the potential income he or she will get for signing you up to such a policy. Keep that in mind when you discuss universal life insurance with an insurance agent.

Universal life insurance may make sense in certain instances, especially in proper estate planning. So, rather than discussing universal life insurance policies with an insurance agent, it may be better to also discuss such policies with another type of financial professional such as a financial planner or with a tax professional who specializes in estate planning.

As always, if it sounds too good to be true, it probably is.