Wednesday, June 15, 2022

What Is Universal Life Insurance And How Does It Work

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Life Insurance Is A Crucial Part Of A Complete Financial Plan Learn How It Works The Different Types And Whether You Need Coverage

How Does Universal Life Insurance Work?

Youve probably heard that you need life insurance but arent quite sure what it is, what the pros and cons are, or where to start. Luckily, youre in the right place.

Life insurance is an important aspect of a complete financial plan up there with emergency savings, retirement contributions and paying off debt. For most people, helping to financially protect loved ones in the event of premature death is of crucial importance. And, the best part? It doesnt have to be expensive.

Additional Information To Note

Flexibility is generally the key feature of Universal Life Insurance. The premium paid can be as little as the policy expenses, or as high as the insured/contract holder would like to make them . UL is traditionally referred to as unbundled because the premiums paid are separated into expenses and cash value. Whatever extra is placed beyond expenses goes to the cash value and earns interest.

Additionally, the policyholder can easily adjust their death benefit as they wish. There is a way to increase the death benefit and the insured can reduce the death benefit by contacting the insurance company and making the request.

Tips For Buying Life Insurance

  • Consider talking to a financial advisor about life insurance. Finding an experienced financial advisor doesnt have to be difficult. SmartAssets free tool can match you, in just minutes, with an experienced professional to help you meet your needs. If youre ready, get started now.
  • Alternatives to the above-mentioned types of life insurance are less well known but are sometimes worth examining. They include return-of-premium, endowment and no-exam policies, any one of which may be suitable for you.

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An Explanation Of Universal Life Insurance

Universal life insurance was launched in the early 1980s at a time when interest rates were historically high and its forebear, whole life insurance couldnt satisfy consumer appetites for high returns that were available in bank CDs and money market accounts. Universal life offered an alternative means to purchase a permanent form of life insurance that also provided flexibility, low costs, and the ability to earn competitive rates of return all of which was not available in the more rigid and low yielding whole life policy.

Although interest rates have come back down to earth, universal life remains a popular choice for people due to its relatively low rates and adjustable premium capabilities. For many people, universal life is easier to understand than whole life because of its transparent structure consisting of a death benefit, a separate interest bearing savings account and clear withdrawal provisions.

Super Easy And No Upsell

How Does Life Insurance Work?

Super easy! I was putting off purchasing life insurance as all I wanted was a term policy and was dreading the thought of having to meet or speak to a broker and deal with the dreaded upsell tactics. While researching options, I stumbled across Haven Life and began looking into it. Thrilled that I did. I could not have imagined an easier, more streamlined process from beginning to end. Very easy process and excellent, easy-to-understand documentation on the site.

Thomas

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Complete A Medical Exam

Many life insurance policies require a medical exam to determine whether youre eligible for a policy and determine your premium. During the medical exam, youll answer questions about your medical history and your familys medical history. Youll also get a thorough physical that includes the doctor measuring your blood pressure, pulse, height, and weight and collecting a blood and urine sample.

Not all insurance policies require a medical exam, but keep in mind that those that dont may come with higher premiums.

What Are The Different Types Of Life Insurance In Canada

There are two main types of life insurance in Canada: Term and permanent. Term life insurance covers you for a finite period of time, which means you get coverage for a set number of years or until you reach a certain age . Its typically purchased to cover temporary financial needs, such as debt repayment, mortgage protection or education fees for your children.

Term insurance is a great solution for Canadians during their working years, but also for key moments in a persons life, such as when they get married, start a family or buy a home, says Rob Hollingsworth, head of distribution, individual insurance at Manulife.

Permanent life insurance is a policy that you maintain for the rest of your life . Its usually bought for estate-planning purposesthat is, leaving a lump sum to your beneficiaries. The other key differences are that your premiums typically dont increase and most permanent policies accrue some cash value. There are three subtypes of permanent life insurance: whole life, universal life and term-to-100.

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You Choose Where To Allocate Your Money

With variable life insurance, you can allocate your accumulated cash value into subaccounts that give you diversified options, including exposure to the stock market. You have the autonomy to select each individual investment option and the amount allocated to that fund, or you can use a preselected asset allocation model based on your risk tolerance . This can allow you to be more aggressive than you could be with a more traditional whole life policy.

Universal Life Insurance Vs Whole Life Insurance

How does Universal Life Insurance Work

Universal life insurance is similar in many ways to whole life insurance. Both are permanent policies that offer a savings component in addition to the insurance benefit. Together they are the most common forms of permanent life insurance. However, they have a few key differences. The most important are:

Savings Return – A whole life policy has a fixed, guaranteed rate of return. A universal policy has its rate or return set either by the market or your investment choices.

Death Benefit – A whole life policy has a fixed death benefit. With a universal policy you can adjust the death benefit as needed.

Premium Flexibility – A whole life policy has a fixed premium. With a universal policy you can adjust the premium by adjusting the death benefit or accessing the savings account.

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Compare Types Of Universal Life Insurance

Some universal life products offer you the flexibility to design the product to meet your needs, with the ability to increase and decrease the amount of coverage or premium payments as your circumstances change. This flexibility can help you address a wide variety of financial needs.

Benefits

Average Cost Of Guaranteed Universal Life Insurance

Averages below are examples of annual rates for a $1 million GUL policy for healthy non-smokers, guaranteed to age 100 or older.

$14,647

$12,660

Averages are based on the five cheapest quotes we found online for a $1 million guaranteed universal life policy, for healthy non-smokers of average height and weight.

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Should You Choose Universal Life Insurance Or Whole Life Insurance

Whole life and universal life insurance policies are similar as theyre both forms of permanent coverage. The primary differences are that the cash value for whole life insurance policies grows at a guaranteed interest rate and premiums are level for the life of the policy. This can be both an advantage as well as a disadvantage when compared to universal life insurance.

Key Differences
Range of options, minimum can increase over timeLevel for life of policy

Therefore, universal life insurance policies have greater upside potential when the insurers portfolio does well, as the cash value can grow at a higher rate. But when the insurer performs poorly, the cash value interest rate for a universal policy would be lower than that of a whole life insurance policy. Similarly, when the insurer performs poorly, usually during periods of low interest rates in the market, or as you get older, the insurer is more likely to increase the cost of coverage. Since whole life insurance premiums are level, you know how much youll have to pay at any point to keep coverage in place.

What Are The Disadvantages Of Universal Life Insurance

Universal Life Insurance

Universal life insurance typically comes with higher premium payments compared to a term life option. Also, youll likely have to pay administrative fees for the cash value component. The cash in your savings vehicle can fluctuate, particularly if its tied to an index or mutual fund. That can cause your premium to increase, putting a greater financial strain on your wallet.

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What Are The Benefits Of Group Universal Life Insurance

If your company has a group universal life insurance policy, there are many advantages to taking advantage of this life insurance offering. The biggest advantage is that you may be able to save a lot of money on universal life insurance by going through a group policy, depending upon your age and health. Universal life insurance can be very expensive when you purchase it on your own, so group policies are a good way to get permanent coverage that you might not otherwise be able to afford.

Additionally, most group policies do not require an in-depth medical exam. When you purchase an insurance policy on your own, you need to complete an exam as part of your application process. Those with chronic health conditions are typically charged higher prices and may even be denied coverage completely! With a group policy, youll still have to answer health questions in order to get the policy, but your health wont be as big of a deciding factor when it comes to your premium prices. This enables those who are not in great health to buy a universal life insurance policy at a great price.

Universal Life Insurance Vs Term Life

Term life insurance only covers the policyholder for a certain number of years. If the policyholder dies within the term, the insurance company pays the benefit to the policyholder’s beneficiaries. If the policyholder is still living at the end of the term, the insurance company keeps all the money.

These policies are more affordable than permanent life insurance. They’re popular choices for parents of young children who want to ensure that their families could still continue to pay their bills following their death.

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How Much Does Universal Life Insurance Cost

Because universal life insurance policies are permanent and accrue cash value, the premiums are a lot higher. However, it can be difficult to create a long-term budget for this type of policy because of its flexible premiums. And before your policy builds up cash value, youâll be paying a lot of money to have that flexibility.

The actual cost of universal life insurance isnât fixed when you buy it, making it financially risky.

Additionally, the cost of a universal life insurance policy usually increases over time â on a policy that already has minimal investment guarantees â so itâs not the best vehicle for asset accumulation.

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What Happens To Cash Value In A Universal Life Policy At Death

Lesson 2: How does Whole Life and Universal Life Insurance work?

Cash value is really meant to be used during your life. Once you pass away, any cash value generally reverts back to the life insurance company. Your beneficiaries get the death benefit, which is the face value of the policy minus any unpaid policy loans and withdrawals.

That said, some universal life policies have the option to provide face value plus cash value to beneficiaries when you pass away. As you can imagine, this feature is more expensive.

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Whole Vs Universal: Making A Permanent Choice

Whole life and universal life insurance are both considered permanent policies. That means they’re designed to last your entire life and won’t expire after a certain period of time as long as required premiums are paid. They both have the potential to accumulate cash value over time that you may be able to borrow against tax-free, for any reason.

Cons Of Indexed Universal Life Insurance

As with anything, you may face some drawbacks to choosing indexed universal life insurance:

  • Caps on returns: You may not benefit completely from an index fund rise â most companies set a “cap” or upper limit on what you can earn. This type of restriction can limit how much your account benefits each year, even when the underlying index performs well.
  • Costs increase over time: Many whole life policies average the cost out over a number of years. However, indexed universal life insurance policies increase over time. You’ll pay less for your premiums at the beginning and they get more expensive as you age.
  • Fees, fees, fees: You may pay numerous fees, which can affect how much you earn through your policy. For example, you may pay extra for administrative fees, riders, commissions, and more. Check with your insurance company about fees before you choose the right type of life insurance for you.
  • You won’t earn dividends: You won’t earn dividends on the money in your account. If you invested in an index fund through the stock market on your own, you’d potentially receive dividends, unlike with an indexed universal life insurance policy.

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What Benefits Do People Get From Life Insurance At Different Stages In Life

Life insurance can be a powerful tool for protecting your financial confidence and especially the financial confidence of the people who depend on you so most adults should consider it. However, before you get a policy you should ask yourself: what type of financial protection do you need at this point in your life?

A Sample Case Study Of Variable Universal Life Insurance Policy

Features of Indexed Universal Life Insurance:

To give you a better idea of what a VUL looks like in action, well pull the illustration for an accumulation VUL from John Hancock. The illustration is for a woman, 42 years old, in good health who is looking to invest $6,000 annually for about 18 years until she is 60 years old. She will invest a total of $108,000 into the policy with 18 years of premium payments.

Shell be drawing money from the VUL cash value from the ages of 61 to 100 years old at a rate of about $1,069 per month . For 40 years, she will receive a total of $513,160 in cash, without paying any pennies in income tax. This will deliver 4.75X return on her investment in the variable universal life insurance policy and this doesnt count death benefit yet.

Her policys cash value is invested in over 50 different securities, including different:

  • Bonds
  • Mutual Funds
  • ETFs

The securities selected will be a health mix of aggressive and conservative securities, including a couple fixed rate indexes. When creating your policy portfolio, youll be able to pick whatever ratio of securities you like. Just remember that if your investments dont do well, your cash value may not grow and it could even lose value!

With regular contributions of $500 per month and an assumed gross rate of return of 8% and minimum fees, her cash-value will grow to about $185,000 by the time she turns 61 years old. The total death benefit will be about $366,000.

Age
$46,614$46,614

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Term Vs Whole Life Insurance: How They Differ In Cost And Accessibility

Term life insurance policies are typically less expensive because the majority of people will outlive the policy and therefore not collect . The amount you pay in premiums is determined when you purchase the policy and will stay the same for its duration, but you can expect premiums to increase if and when you renew your policy , as the costs are adjusted to reflect the increase in your age. Term life insurance is good value for temporary needs and is what most people opt for when they still have young families, debt and/or a mortgage.

The premiums for permanent policies are higher since a payout at some point is guaranteed , but, on the upside, you can rest assured that they wont increase as you age or face health challenges. So the younger and healthier you are when you acquire your policy, the lower the premiums.

There can be some flexibility with permanent life insurance premiums in that they can be paid either over the duration of the policy or over a shorter period by paying an increased amount. As well, universal life and some whole life policies offer the option to pay more so you can take full advantage of the investment option, a strategy that can be used to increase the final payout or to help fund retirement or other income needs later in life. But its generally used by high-income earners who are at their limits with traditional tax-free investments.

What Is Life Insurance And How Does It Work

Life insurance is a contract through which a policyholder pays an insurer in exchange for a payout when the insured dies. Most adults have heard of life insurance, and many have been told that they should have it. However, conversations around life insurance often leave people wondering what types of life insurance are available, what the various industry terms mean and whether such policies are worthwhile. Heres what you need to know about the types of life insurance and how it works.

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Universal Vs Term Life Insurance

Unlike universal, term life insurance only lasts for a set number of years. We recommend a term of 15 to 20 years. And its just life insurancenothing more, nothing less. Without that cash-value dead weight, the premiums are much, much cheaper.

So if you were to take the money youd save going with term life and invest it in a mutual fund over 20 years, youd end up with $27,217! And all of that would go into your pocketnot the insurance company.

Plus, you wont need universals lifetime coverage if you start investing for retirement now. Youll be self-insured. What do we mean by self-insured? If you invest 15% of your household income for the next 20 years, by the time your term life plan comes to an end, you wont even need that death benefit.

Term and universal do have one thing in common: If you die during the policy, the insurance company will pay the death benefit. But its where theyre different that really counts. Youll need deep pockets if you choose universal life insurance.

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