Please tell me about Universal Life Insurance.
Is it a good idea?
from Motley Fool
I’ve got a large amount of universal life mainly because that’s what was offered through my workplace; plus it’s portable (if I quit, I can keep up the policy). I do put aside a little bit each month in the “investment” portion but it’s not required. It’s considerably cheaper than a similar whole-life policy (I have one whole-life that’s 1/8th of the universal premium, for roughly double the cost). However a true whole-life policy will never increase in cost (and I think is valid for as long as you live, while other sorts tend to terminate when you hit a certain age).
Seems like the general financial opinion is that most people need term, vs. whole. I carry the one whole policy for a list of reasons to long to go into here.
No. Run far away from it.
If you want life insurance, buy convertible & renewable term insurance from a company with an A++ rating from A.M. Best.
Can you comment on why to run far away from the universal? I’m not arguing, just wondering what the reasons are to avoid it. And yeah, renewable (IIRC, that means they can’t refuse to renew when your term is up just because your health has headed downhill) is good.
Convertible means “convert to whole life”, right? That’s the background for why I have a whole life policy; I had my main life insurance through my employer, and it was term; when the employer sold our division, the company’s new owner had universal life - which refused me coverage for health reasons (health insurance was OK, just the life turned me down). So I converted a portion of the term to a whole policy - couldn’t afford to convert the whole amount.
I finally got coverage through the new employer for universal life, and the advantage there is that if I leave, I can maintain the coverage as universal, at group rates.
Actually, the standard advice from financial advisers, like David Bach (of the Finish Rich) books), is the opposite of Crafter_Man’s. Bach recommends universal variable as an investment vehicle.
But, IIRC, you are single and have no dependents. Why would you want life insurance?
That has not been the “standard” I’ve seen in more than ten years of reading financial advice – nor was it what my own advisor recommended for me and the Hubby.
We have a term policy that expires in 2011 (I think; I have it ticklered), and when that expires, we’re not renewing because we expect to be self-insured against loss of income by that point. (IOW, we expect to be financially independent.)
The question, though, is, What are the OP’s goals, and what form of life insurance will best help him achieve those?
UL is more or less an annual term policy with an investment account attached to it. A chunk of your monthly payment goes toward the premium, the rest goes into the investment and earns interest (or is invested in a mutual fund and grows that way). The idea is that as you get older, the annual term insurance does get more expensive, but you have the liquid cash in the account which can be used to supplement your monthly premiums and keep the insurance current. That’s the idea.
What people figured out shortly after that (or maybe it was part of the intent of the product, I don’t recall) is that the money you put into the account grows and is not taxed until you withdraw it. So for a short while folks were dumping all kinds of dough into them for that good tax-deferred growth. Gubmint put the kabosh on that pretty quickly so now there are limits to how much cash you can have in one of these guys in proportion to life insurance. You want an investment? Buy an investment. You want life insurance? Buy life insurance.
*The cheat? Well, as you know, the account grows tax-deferred. You pay no tax until you withdraw the loot. But you can borrow up to all of the available cash. Borrowing is not withdrawing, so no taxes. The money is yours already, so it’s not a debt you need to repay (as long as you don’t mind the policy lapsing). Which cheats out to…tax-FREE growth.
(* I BEG someone to come in here and put a bullet in that one. It sounds too good to be true)
Um…no bullet, at least on the Group UL contracts that I know. It’s a loophole that allows you to take out a loan, and then not pay it back. Since you are the owner of the policy, the thought is that you’re defaulting against yourself…so you can forgive it, making the point moot. This is accurate as of 3 years ago, when I sold Group UL to existing Group Medical clients.
Darn, I hit submit by accident.
As far as UL goes, I look at it as a type of hybrid between Term Life and Whole Life.
The pros:
[ol]
[li]Minimum interest rate on input cash value. My company had it at 4% (they had purchased a ton of money at a great rate, and were able to maintain 4% over a 10-year span…unusual, but nice).[/li][li]It’s not quite as risky as some Variable and Whole Life policies. You typically select Mutual Funds for the investment vehicle (if you don’t like the 4%). [/li][li]In a Group environment, it’s typically Guaranteed Issue, which means you don’ thave to take a physical.[/li][li]If you have UL, it typically is effective to Age 100, giving you ongoing coverage in case you get a chronic illness.[/li][/ol]
Cons:
[ol]
[li]Not nearly as cheap as Term Life. [/li][li]The first years, your premiums are heavily weighted to the “pure insurance” aspect of the coverage. Meaning…you won’t accumulate cash value very quickly. The insurance company wants to get the risk paid for, and THEN give you money for the tax-deferred earnings.[/li][/ol]
It would help me if you told me it was individual or Group-based.
Oh, the chief objection to UL is usually that you can buy Term and invest the difference yourself, at a (hopefully) higher rate of return. The statistics (sorry, no cite) say that doesn’t happen too often.
-Cem
That last sentence of Cem’s is the kicker. IF you buy a term policy for the same amount, AND faithfully invest the difference in the premiums every month, then you’ll do better in the long term (almost always, unwise investments can change this, of course). However, many people will not faithfully invest the difference every month, they forget about it, spend the money on something else, only do it part of the time, etc… The beauty of UL is that it forces you to make this investment, after all, you’re just paying your life insurance premium, right? The investment component is there but “forgotten”, IYKWIM.
And one positive caveat…if you’re a sucky investor in general, or tend to invest in low returns, or don’t like variation in your returns, most UL policies will offer a minimum percentage of return, which I believe is locked in for the policy life (might vary per state or insurance entity). We offered (as I mentioned above) 4% for the life of the contract (to age 100…if you lived to 101, you were out of luck), which would have served you well in the recent ‘recession’.
Werddave is absolutely correct in the investing you own part…IF you can commit to it. I think most financial advisors assume an 8% ROR on investments.
-Cem
I have a niece.
I wanted her to be able to have something.