Universal Life Insurance Policy Advantages and Disadvantages

October 17, 2018

A life insurance policy is meant as a way to ensure that a specific amount of money is paid out to beneficiaries upon the death of the policyholder. This money often comes at a time when families and spouses need it the most and have no capacity to deal with any added stress or additional problems. In recent years, life insurance has become more adaptable, and a number of types of life insurance have sprung up in order to differing needs. One type that is becoming more popular is known as universal life insurance, which offers a number of benefits over other types of insurance which are currently on the market.

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A universal life insurance policy is a combination of two other forms of life insurance — term life insurance and whole life insurance. Unlike a term life insurance policy, a universal life insurance policy can be purchased for a person’s entire life. However, unlike a whole life insurance policy, the insured can change the premium rate and level of coverage as need be. Universal life insurance is also similar to a combination of a life insurance policy and an investment. Although universal life insurance is an insurance policy, it is used by many as an investment. There are three major disadvantages to universal life insurance: the rising costs of fees, the possibility of poor investment and the low rate of return versus other investments.

Advantages of a Universal Life Insurance Policy

The first benefit of a universal life insurance policy is that it can accrue interest over time, based on the amount of money that is placed in the policy. The policy is based on a cash value, one that is added to, each time a premium payment is made. If no payment is made to the policy, the costs of insurance itself, as well as any other charges associated with the account, are withdrawn. Over time, the value of the policy can increase significantly and may be tied to a number of different factors for this increase, including a stock, bond or an interest rate index – whatever the insurance company specifies in the policy.

The second benefit of a universal life insurance policy over something like a term life policy is that the amount of coverage can grow over time as the universal life account grows. A term life policy comes with a monthly fixed premium that must be paid in order to have a specific amount of insurance that will be disbursed at death. Universal life, meanwhile, does not have a fixed premium and because of the interest aspect of the policy, it can grow by a significant amount before it is finally cashed.

Another benefit of this type of policy is the ability to use the overages of the policy to pay for things other than a cash disbursement on death. These policies can be used to help pay down mortgages, as a charitable gift, or a life insurance retirement plan. This flexibility makes this kind of life insurance policy one of the most attractive to those who are looking to do more with their life insurance than simply have it pay out a single, large amount upon death.

Universal life insurance offers a number of benefits over other types currently on the market including the ability to grow based on interest, greater flexibility with premium payments, and a broader use over time, making it an attractive option for many families.

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Major Disadvantages of Universal Life Insurance Policies

First, a major drawback of universal life insurance is the rising cost of fees. When individuals choose universal life insurance, they must pay fees to the broker in addition to insurance company fees to invest their money. The fees for this type of insurance are generally higher than the fees charged for any other type of insurance or the fees charged for investment brokers. As the fees continue to rise, individuals make less money on these policies because so much of the money they pay out is not invested but is simply going to pay these fees.

Second, universal life insurance works a little differently than other types of life insurance. Where other types of life insurance have a set benefit, universal life insurance benefits depend on the money made off of investments. If money was invested poorly or if the economy is suffering, individuals will not make as much money as they could have with a different type of investment. In addition, when poor investments lead to a low rate of return, the loved ones that insured people are trying to protect with universal life insurance do not get as great of a benefit, which means that they do not get the money they may need to survive in the event of a sole provider’s death.

Finally, universal life insurance is typically not a smart investment practice. When individuals invest in mutual funds or other types of investments, they generally make more money than they do with a universal life insurance policy. Although some people choose a universal life insurance policy to help them commit to investing, investing in something else will generally earn them more money.

Although universal life insurance may appeal to some, it is not often the best choice due to rising costs and lower returns on investment. Other life insurance policies and investment techniques may yield better results, earning more money to protect a person’s loved ones.

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