I dont know much about universal life insurance policies. We recently spoke with an insurance agent and he is trying really hard to sell us on this. Im 29 and my fiance is 24. We both have 401K plans and a great term life insurance policy at work. What are the pros and cons about these universal life insurance policies. Seems to me the insurance guy wants the commission and doesnt much care about our needs.
I am not an expert on this by any means. I did have a universal life insurance policy that I recently cashed in. I was convinced to purchase it by a lawyer who said “I, for one, would rather own (whole life) than rent (term) a life insurance policy.” After about 10 years the insurance company said to me that I could either double my premiums, or halve the insurance amount. I chose to halve the payout. Then I decided that I didn’t really need this extremely expensive policy and cashed out. I think that universal (or whole) life is a rip off, and would recommend that you think twice about it. Keep in mind that a typical payout to the agent who sells you life insurance is the first years premium.
If you think the insurance agent is more interested in a commission than your needs, find a different agent. There are a lot of them.
Having made that point, the original idea of universal life insurance was to be, well, universal. A big payoff when you’re young and have a lot of family obligations, a smaller payoff when you’re older, some cash value when you retire, all wrapped up in an affordable premium subsidized by the insurance company’s other investments.
Those other investments haven’t worked out so well over the last decade, so the insurance companies have pushed up the premiums. Also, how much insurance do you really need? You don’t have children and if your fiance has a good job, she can support herself if something happens to you. If you’re buying a home, you’ll probably have to get mortgage insurance for that, and you already have term insurance from your job.
Take the amount of the premium you’ve been quoted, and compare it with a straight whole life policy (lower immediate payoff, but a set premium forever, and cash value), a term life policy (lower initial premium, but either higher premiums or less coverage in the long run), and a Roth IRA (a better retirement option.)
IMHO, you should keep insurance separate from your investments. Insurance companies like to mix the two up so that they get to hold onto more of your money. Also, if you do happen to die when the policy is in effect, the insurance company only has to pay out the face value of the policy–and they get to keep the cash value of the investment! (Whereas with a term policy, your heirs get both the face value of the insurance as well as any investments you might have that are separate.)
Life insurance has a very specific purpose–to help care for people who are dependent on you if you should pass away. If you don’t have any dependents, you don’t need life insurance, any more than someone without a car needs auto insurance.
I’ve seen young, single people with no dependents who were sold large universal and whole life insurance policies “to lock in low rates.” This is as silly as buying automobile insurance before you own a car. People are also sold universal and whole life policies instead of term policies because they are told that they won’t be able to otherwise get insurance when they are old. However, when you are old, and your dependents are supporting themselves, you don’t need life insurance, any more than you need automobile insurance after you sell your car.
If you need life insurance, buy a term policy. Rather than sink money into an insurance company’s investment fund (and risk losing the whole investment in the event of your death), take the difference in premiums between a term policy and the universal/whole life policy and invest it in an IRA.
For people considering universal or whole life insurance, the catch phrase is, “Buy term and invest the difference.”
This is a particularly silly analogy that doesn’t make any sense whatsoever, in my opinion.
I think that so-called “universal” and whole life insurance is one of the biggest scams ever pulled on the American consumer.
[quote=“robby, post:4, topic:556534”]
IMHO, , if you do happen to die when the policy is in effect, the insurance company only has to pay out the face value of the policy–and they get to keep the cash value of the investment!
First thing…Tthe above information is completely wrong. If this is wrong I would hesitate to take advise from this person.
First don’t take advise on a very long term product such as life insurance from a message board. I am not a huge fan of the UL product but I would seek out information from an insurance professional who is not commission drivin.
The two companies I have sold for, Farmers Insurance and Met life both sell Universal life policies where you receive the face amount of the insurance policy along with any accumulated cash.
The cash value is paid out at the time of loss as a combined death benefit.
For example if you have paid in to a universal life policy for 20 years and it has a $20k cash value on a 100k face amount, you would get a 120k payout at death minus any policy loans.
I can scan in contracts as a site if you need.
I don’t believe the information I wrote above is “completely wrong.” While I don’t doubt there are some newer insurance products that do pay out some cash value at time of death (though I’d expect that the rate of return would be adjusted downward accordingly, of course), in traditional whole life insurance, the cash value of the policy is sacrificed if the death benefit (i.e. the face value of the policy) is paid out.
Here are some cites:
From wikipedia:
From here:
Even in the case where a cash benefit is paid out at the policyholder’s death, it’s still not as useful as “buying term and investing the difference,” because if you borrow against the cash benefit, you generally reduce the death benefit, whereas when you keep your investments separate from your insurance, any time you cash out your retirement benefit, your insurance coverage is unaffected so long as the term policy is in effect.
From here:
Another thing to consider with policies through work is what happens if you get sick and then have to quit your job? You won’t be able to get new term life insurance with the preexisting condition.
Whole life insurance policies offer this nifty little perk called “cash value.” A whole life insurance policy will accumulate a cash value over time, and the cash is tax-deferred, which means you will not have to pay taxes on the cash value your whole life insurance policy accumulates. Many people enjoy the cash value perk that whole life insurance policies offer; however, it must be noted that you cannot both reap the rewards of your cash value and have your beneficiary receive your death benefits [emphasis added].
This is silly … there is a HUGE diffrence between Whole life policies and Universal policies. Anyone who has a real desire to know what a policy will do please call a insurance pro or the state insurance comm. I have been selling UL and whole life policies for 28 years and have handed death claims to my insureds on UL policies over the face amount. I wish all good luck with a future in Life sales.
and for a cite the first hit on Google search for whole life vs universal life.
“If the policy is set up properly, the entire investment account plus the face value of the insurance policy goes to the beneficiary tax-free on death of the insured. There are not even any Probate Fees. The same applies to a whole life policy but the cash value may or may not be in addition to the face value depending on the type of Whole Life Policy”
From
http://www.lifeinsurancequote.com/articles/universal_compared_to_whole_life_web_article.asp
Please don’t give professional advise if you are not one.
You’re confusing “universal life” with “whole life”.
That being said, buy term and invest the difference. The savings portions of whole life insurance tend to be poor investments.
Both policies include an investment as part of the policy, so in this respect they are more similar than not when compared to term life insurance.
Broadly speaking, there are two types of life insurance: policies for which you simply pay for the insurance (term life insurance), and policies that also include some type of investment option. There was originally just one type of this latter type of insurance, and it was given a catchy name by the industry: “whole life insurance.”
The insurance industry has since developed many other types of life insurance policies that include various investment options, including so-called “universal life” insurance. It was my understanding that all of the insurance products that included an investment option could be broadly referred to as types of “whole life insurance,” and I apologize if this resulted in confusion.
I see that the preferred term for these types of policies is actually “permanent life insurance.”
In any event, I still think it’s silly to mix up investments and insurance.
I am certainly not pretending to give professional advice. I am not an insurance professional. Regardless, I don’t think anybody should be getting professional advice from a message board in the first place.