What Are The Disadvantages Of Universal Life Insurance

Analyzing Various Universal Life Insurance Aspects

An overview below summarizes both positive and negative aspects of Universal Life Insurance

What Is The Difference Between Whole And Universal Life Insurance

Both are types of permanent life insurance, so your policy doesnt expire because you hit a certain age. The main difference is how the cash value portion of the account is handled. With whole life insurance, your premium is fixed. With universal, your premium can change if you opt to pay for it with your accumulated cash value.

Because the value of your cash savings can change, your premium payment can jump up if your cash value goes down or you borrow money from it.

Types Of Life Insurance

There are two major types of life insuranceterm and whole life.1. Term LifeTerm insurance is the simplest form of life insurance. It pays only if death occurs during the term of the policy, which is usually from one to 30 years. Most term policies have no other benefit provisions. There are two basic types of term life insurance policieslevel term and decreasing term. Level term means that the death benefit stays the same throughout the duration of the policy. Decreasing term means that the death benefit drops, usually in one-year increments, over the course of the policys term.

2. Whole Life/Permanent LifeWhole life or permanent insurance pays a death benefit whenever the policyholder dies. There are three major types of whole life or permanent life insurancetraditional whole life, universal life, and variable universal life, and there are variations within each type.

In the case of traditional whole life, both the death benefit and the premium are designed to stay the same throughout the life of the policy. The cost per $1,000 of benefit increases as the insured person ages, and it obviously gets very high when the insured lives to 80 and beyond. The insurance company keeps the premium level by charging a premium that, in the early years, is higher than what is needed to pay claims, investing that money, and then using it to supplement the level premium to help pay the cost of life insurance for older people.

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What Is The Best Alternative To Universal Life Insurance And Why

The best alternative may vary from person to person, but experts suggest term life insurance as the best alternative. It is because the term life insurance provides only the coverage and that too for a fixed period such as 10, 20, or lets say 30 years. As there is no cash value, the premium is cheaper for term life insurance policyholders.

You can invest the differential amount in some other product. It makes sense because the wealth created this way wont go to an insurance company.

Who Should Consider Universal Life Insurance

If you want life insurance coverage that lasts the duration of your life, you might consider a universal life insurance policy. For example, universal life insurance can fund a trust to take care of a special needs child or other dependents after youre gone.

You might also consider a universal life insurance policy if you have big long-term savings goals and need both an investment vehicle and life insurance, but only after youve maximized other savings options such as retirement plans.

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More Disadvantages Of Indexed Universal Life Insurance

Remember I said indexed universal life insurance is life insurance?

Well, if you are in questionable health, your cost of insurance is much greater.

Look at my diagram above. If the cost of insurance is greater, this greater increase drags your cash value return down. You have to pay a higher premium into the IUL.

Golly, remember that this is life insurance!!!

Finally, be mindful of looking at carrier-provided illustrations. Nearly all the ones we have seen start the illustration in the year 2007/2008, when the market tanked, or at the tech bubble in 2000 that continued into 2003. These illustrations make it appear that indexed universal life insurance is a great, long-term solution. It can be. Yes, it can.

However, if you purchased an indexed universal life insurance policy in 2009/2010, your returns are surely behind that of the market.

More often than not, the IUL performance will trail that of the market. Even with recessions and pullbacks, over the long-term.

This all brings us to the third and final tenet on purchasing indexed universal life insurance. Purchase it for the life insurance component!!!

The Disadvantages Of Universal Life: Regulators Issue A Warning

Whole life or universal life: which is better? Is indexed universal life a viable option? Is whole life really worth the extra premium cost? Should I cancel or exchange my whole life policy for a newer or different type of policy?

These are questions have been debated amongst insurance agents, financial advisors, so-called financial experts, gurus, and financial bloggers for years. And by now, we believe the answers are actually quite clear-cut. The dangers of disadvantages of universal life can no longer be ignored.

In September of 2018, MSN.com published an article from the Wall Street Journal: Universal Life Insurance, a 1980s sensation, has backfired. It details multiple instances of policy owners who have had premiums double, triple, and worse.

John Resnick, co-author of an American Bar Association book on life insurance, said of hundreds of older policies he has reviewed over a decade, easily 90% or more actually were in trouble or soon to be in trouble. Many people are sitting on a ticking time bomb, and most probably arent aware of it.

Some, like 94-year old North Carolina retiree Bernice Sack, have kept paying, even though her premiums have increased five-fold and she has put more dollars into her policies than heirs will receive. Others have simply surrendered their policies after years of paying into themincluding insurance agents who thought they understood what they were buying.

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What Are Your Risks Associated With Owning Indexed Universal Life Insurance

There are some disadvantages of universal life insurance and risks that come from owning an IUL policy. The risks you assume when owning Indexed Universal Life Insurance are:

A Second Possible Alternative

Frequent readers of this blog may be surprised to hear me say this – but I truly believe that participating whole life insurance is a more suitable permanent policy for those that want it than Indexed Universal Life. Whole live, as opposed to IULs at least has guarantees and a fixed payment schedule. The only thing left up in the air with WL policies is the dividend ratio. This allows whole life to truly be a policy forever. The capricious nature of IULS and possibly VULs make them unsuitable for anyone other than most astute investors.

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Medical Exams For Universal Life Insurance

Many sellers of universal life insurance use full underwriting, meaning they take time to fully examine your application, verify information, and require that you do a life insurance medical exam. The medical exam usually includes height, weight, blood pressure, and blood and urine samples. Its generally done by a paramedical professional hired by the insurance company, and can be done at home.

Theres a wide variety of data about you available to insurers, who can use it in pricing policies. This includes data on consumer credit, your prescription drug history, your answers on past individual health and life applications, and your motor vehicle record. Its also common for insurers to request your medical records.

More On Investments With Universal Life Insurance

All the premium payments you make go into a policy fund. This fund pays for the cost of your coverage plus investments. The balance remaining after coverage costs are invested on a tax-advantaged basis. There are a variety of investment options for you to choose from, based on your risk tolerance and financial objectives.

How much your investment will grow depends on the performance of your investments and the amount of your premiums. The money in the investment portion of your account is yours. You can use it to make premium payments or a source of savings. You can use it as collateral for a loan, withdraw it outright or just let it grow for financial security for your loved ones. Dont forget that borrowing or withdrawing funds from your policy reduces its cash value.

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Overview Of Universal Life

Universal life is an adjustable type of permanent life insurance that allows you to make changes to two main parts of the policy: the premium and the death benefit, which in turn affects the policys cash value. Universal life combines the pure insurance elements of term life with the savings account features of whole life insurance. Below are some of the overall pros and cons of universal life insurance.

Universal Life Insurance Definition

Universal Life, by definition in Canada, is considered a Permanent Life Insurance product. It is designed like all insurance by an actuary. The original premise of Univeral Life was to unbundle the guaranteed components and savings aspects of Whole Life insurance. With Whole Life, these are fully managed by the life company, and many guarantees are provided. UL, in essence, breaks those segments apart so that a policy owner can do it themselves. By unbundling all the items the Life company manages with a team of experts and handing those portions to the policy owner, the life company also hands-off managing the risk. The result is the risk of mortality charges and performance of any invested capital now lands on the shoulders of the policy owner. This can look good on paper as the initial premiums can entice people by being lower for the same starting amount of death benefit. Like an iceberg in the water, most of the real issue is hidden below the surface with UL policies.

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Is Universal Life Insurance For You

Universal Life insurance is a suitable option for high-income earners who:

• Have exhausted other retirement savings options such 401k, IRA, and Roth IRA accounts.

• Have long-term dependents such as adult children with disabilities or parents that require long-term care.

• Want to cover state taxes for their heirs.

• Prefer flexible premiums over the fixed premiums of whole life insurance.

• Don’t mind that the cash value growth is usually tied to the market, which will determine how much the account will earn.

Premiums Are Higher And Change

Building a cash value has its cost higher premiums. Usually, term life policies are cheaper and the premiums lower. This is because universal life offers a cash value option, which needs to be funded regularly.

Keep in mind:

not only are premiums higher but they also change over time. The older you get, the higher they become. You might consider investing the difference in cost between term life and universal life in something else which gives you more freedom.

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What Is Life Insurance

Lets take a moment to talk about the many aspects of life insurance in general. Then, I will circle back to address the specific question about universal policies and retirement funds.

So, there are three primary parties when it comes to insurance: the insured, the beneficiaries, and the insurer. Life insurance policies are offered by the insurer to protect the income and earning potential of the insured.

If the insured passes away, the beneficiaries who relied on the income of the insured to some degree can continue with a comparable quality of life. This may be in the form of receiving regular income or even getting a lump sum payment.

For example, the head of a household may buy life insurance in order to protect the needs of their children. This coverage could ensure that the children have their everyday needs met, as well as provide for future education expenses, healthcare, and the like.

Life insurance benefits could also help pay for funeral costs, medical bills, and any outstanding debts that the insured may leave behind.

What Are The Disadvantages Of Universal Life Insurance

Posted by Gaurav Chaudhary | Sep 3, 2020 | INSURANCE |

When it comes to securing the financial future of loved ones, the first thing an individual thinks about is getting a life insurance policy.

In the world of life insurance, numerous types of policies are available. Some of them provide real benefits, and some of them leave people guessing whether it will be right to go for this type or not.

A kind of life insurance always on the radar of potential investors is Universal Life Insurance or UL Policy or Cash Value Life Insurance. However, all investors do not put their money into this type of policy.

Today, this article is going to help you learn not only the crucial things about Universal Life Insurance but also its disadvantages. After going through all this information, you will realize why many people prefer avoiding it.

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It Is Still Life Insurance

Here is one of the major disadvantages of indexed universal life insuranceit still is life insurance!!!! And, it is a type of universal life insurance as well.

Surely, the agent ultimately tells you it is life insurance . Before the agent does so, however, you are probably thinking this is some type of investment, right?

Right

Universal life insurance is a hard one for the everyday person to understand. All of its components are unbundled, meaning, in the simplest terms, you can adjust your premiums. You can pay a lower amount if you want. You can even skip a payment if you want to, provided there is sufficient cash value in the policy.

Flexibility becomes a double-edged sword. If costs become too great, and there is insufficient cash value in the policy, the carrier will require you to increase your premium sometimes substantially to keep the policy in force. This is clear from the diagram below:

This brings us to our first tenet on purchasing indexed universal life insurance purchase it for the life insurance component, not for the cash value.

In other words, if you need life insurance for life insurance, you dont need an indexed universal life insurance policy. With commitment, you can buy term life insurance and invest the difference. In fact, in my guide to indexed universal life, I provide a performance example, looking back 27 years . An investment always came out ahead.

The disadvantages of indexed universal life insurance abound. Here are some more

Option B: Increasing Death Benefit

Pros: This option gives your beneficiary a greater financial advantage because he or she would receive both the face value and the cash value amount. Using the $500,000 face value and $100,000 cash value example, your beneficiary would get a total payout of $600,000, if there arent any outstanding loans and interest.

Cons: The downside of this option is that you pay premiums on the full face value for the life of the policy regardless of how much cash value the policy has. So as you increase the face value/death benefit over time, the premium would also increase to keep up with the larger amount of coverage.

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