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Should you buy universal life insurance?
Regardless of your needs, there’s a life insurance policy to meet them. In some cases, it's a good idea to have a variety of policies to meet different needs.
To help you decide which policies are best for you, here's a quick overview of the types of life insurance available.
|Premiums||Low, but increase with age||Level||Flexible||Level||Flexible|
|Face amount||Renewable into old age||Level; can't be changed||Level; can vary||Level; can't be changed||Level; can vary|
|Cash value||None||Yes; no ability to choose investments||Yes; no ability to choose investments||Yes; ability to choose investments||Yes; ability to choose investments|
What's the most popular?
A 2009 study by the Life Insurance and Market Research Association (LIMRA) shows the following results for product market share:
- Universal life, 41 percent.
- Term life, 26 percent.
- Whole life, 24 percent.
- Variable universal life, 9 percent.
Universal life policies continue to be popular because many offer a guaranteed death benefit coupled with an investment feature, says LIMRA spokeswoman Catherine Theroux, the latter feature which has helped to drive product sales in the past few years.
Traditionally, the majority of universal life products were purchased by consumers older than 65 who paid higher face amounts for coverage, but that trend began to shift in 2008, when both the face amounts and ages of universal life policyholders dropped slightly, Theroux says. After the financial crisis, “older consumers gravitated to more traditional products like whole life, while younger consumers were attracted to the guarantees and potential growth of the products,” she adds.
Whole life policies gained market share during the current recession as people sought out safer investments, Theroux says, while variable life products never recovered after the 2001-02 economic downturn, a trend LIMRA doesn’t see reversing in the near future.
Because they are more affordable, term life products are typically popular with younger, less affluent consumers – particularly families who need the protection, but may not have the available cash for more expensive products, Theroux adds, which offer investment options in exchange for higher premiums.
How it works
Universal life is designed to be flexible life insurance. As long as you pay your premiums to keep the insurance part of the policy in force, you can vary the frequency and amount of your premium payments. As a result, you can vary your death benefit. For instance, you can decrease your coverage to coincide with your declining mortgage. If you want more insurance, you might need a medical exam, even if you had one when you originally bought the insurance. It depends on your age and the amount of coverage you're buying.
Cash value within the policy
You can also put excess money into your universal life policy. The amount is held in a cash-value accumulation fund. You'll usually get a minimum interest guarantee from the insurance company, while the actual performance of the fund is tied to insurance company investments. Because of this risk, your premiums can be lower than those of a whole life policy. You might be able to skip premium payments if there's enough in your fund to cover the premium bill.
Remember any gain in your accumulation fund may be taxed upon withdrawal.
Your level of cash value can also influence either your premium payments or your death benefit. When you buy a universal life policy, if you choose a level death benefit, the insurance company uses your cash value to reduce the amount of risk it takes on your life. This allows the insurance company to reduce the mortality expenses of your policy and reduce your premium payments.
A second option is to have your cash value added to the death benefit of your policy. Your minimum premiums stay steady while your death benefit rises and falls with your cash value.
You are allowed to switch between the two options at any time during the policy, but it might not be easy.
If switching methods significantly increases your death benefit, you might have to take more medical exams and go through the whole medical underwriting process again, says Paul Graham, chief actuary with the American Council of Life Insurers.
Although a universal life policy can allow you to earn somewhat better rates of return in your cash-value fund than a whole life policy, you can't transfer your cash value between possibly higher-yielding sub-accounts as you can with variable life insurance. You're relying on the insurance company's investment strategies, so be sure to check the company's financial strength before buying.
You can make withdrawals from your cash value under terms defined in your policy. Many universal life policies carry back-end surrender charges that are deducted from the balance in your fund. They start out high in the early policy years, and then slowly decrease until they disappear — possibly around years 15 or 20, ACLI’s Graham says.
Double-check your policy
Because it's a hybrid insurance product, universal life's flexibility can be misunderstood. That's why it's important to make sure what you bought is what you were quoted. Check your policy for its guaranteed rate of return, fees, and charges, and the minimum premium required. If the policy is not issued correctly, you'll usually have a "free look" during which you can reject the life insurance contract and get your money back.
Universal life can be an economical alternative to traditional whole life, and in some instances it costs less. If you're interested in buying whole life, you might want to look into universal life. As with any insurance product, it's important you understand how a universal life policy works. It's up to you to figure out if you're getting your money's worth.