Should You Get Universal Life Insurance?
What if you put your life in the wrong person’s hands?
It may sound overly dramatic. However, this is the reality for everyone trying to choose the right insurance, which includes struggling to get a good rate.
Universal life insurance provides a lot of flexibility for many people. However, it also has some drawbacks that may make it a non-starter. How can you know if this is the best insurance for you?
Read on to discover what this insurance is and what its pros and cons are.
What Is Universal Life Insurance?
This is a kind of hybrid insurance policy that mixes investment savings elements with term life insurance elements. The chief benefit of this hybrid is that it allows you to save money while still enjoying the benefits of having life insurance.
This flexibility is good for many consumers, especially those who are younger. However, there are also some potential drawbacks to using this insurance.
There are actually two flavors of universal life insurance. One of them is indexed and the other is not.
Traditional universal insurance is a permanent form of life insurance. Any excess of the premiums you pay beyond the actual cost of life insurance goes into a cash account that grows in interest each year.
As the name implies, indexed universal insurance is tied to a financial index instead of a fixed interest amount. The value of this index determines how much is deposited into your account each month.
Read on to discover the pros and cons of universal insurance to decide if it’s the best option for you and your family!
Pro: Above Average Returns
One of the biggest pros of using indexed universal life insurance is the potential for above-average returns. The returns are tied to the performance of select indexes, so when those do well, so do you.
Those who are nervous about the volatility of the market can also invest in the traditional universal insurance instead. This offers a fixed interest amount, allowing you to go into the purchase with eyes wide open.
Con: The Whims of the Market
As mentioned earlier, the stock market can sometimes be volatile and unpredictable. This is what makes the indexed universal life insurance option a much riskier prospect.
Greater risk does mean greater reward, though. This fixed interest of a traditional universal insurance policy is typically no higher than three percent. Meanwhile, a good year for the stock index behind an indexed policy means that you walk away with a much stronger payout.
Pro: Asset Portion Flexibility
Universal insurance policies are typically advertised towards younger consumers. This is because you have the option of using it for ten or fifteen years and then effectively “cashing out.”
By that point, you will have saved a decent amount of money. Many consumers choose to use that money as a down payment on a home or as an opportunity to invest in a new opportunity.
The bottom line is that universal insurance gives you the asset flexibility that traditional policies lack.
Con: Low (or No) Guarantees
One of the biggest downsides of this kind of insurance is that it offers low guaranteed returns. And sometimes, it offers no guaranteed returns at all.
As mentioned earlier, even the traditional universal life insurance that offers some form of guaranteed return usually cannot offer anything higher than three percent. And the amount is often lower than they because of an unpredictable market.
The indexed universal insurance offers a better possible return, but there are no real guarantees. Oftentimes, financial advisors take the current performance of an index and use it to project your lifetime potential earnings.
However, that index may go up or down. And the market may have another upheaval like it did in 2008. Basically, those counting on the investment side of this insurance need to be wary.
Pro: Tax Benefits
Fortunately, there are a number of tax-related benefits connected to universal insurance. For instance, the death benefit of it is not taxed in most states o by the government. And you can borrow money from the policy and essentially get a tax-free loan if you need it.
Further benefits include that you can access your money at any time. You don’t have to be knocking on retirement age in order to get your funds! And any money that you get back out of the policy is not subject to any kind of IRS penalty.
This is the core of what many people enjoy about universal insurance. It offers a great deal of flexibility regarding the money it helps you save!
Con: Difficult to Choose
One of the ironic cons of universal life insurance is that it presents a difficult choice for consumers. This is because there are benefits and drawbacks to both the traditional insurance and the indexed universal insurance.
Both forms of this insurance are good for younger people because of the ability to earn money over a decade or so and then cash out. And the easy cash access and versatility of funds is a great feature.
However, the form of insurance you choose usually comes down to how lucky you’re feeling. The indexed insurance offers better possible returns, but sudden market shifts can undo years of savings.
The guaranteed returns of a traditional universal insurance policy provide peace of mind. And they may be the best choice for those who will keep their policy even longer. However, you may always be curious about what could have been!
The Bottom Line
If you’re exploring universal life insurance, then you’re interested in growing your money. Furthermore, you’re interested in using the wealth you grow to do the things you’ve always wanted to do.
However, the world of finance is often confusing. You’ve got your dreams, but who will make them into a reality?
At Bonsai Finance, we are the experts in helping you secure the money you need to bring your dreams to life. And our website makes it easier than ever to explore all of your options.
To start that dream project you’ve been putting off, come explore our small personal loans today!