Term Life Insurance vs Whole Life Insurance vs Universal Life Insurance

What Is Universal Life Insurance, compared to term or whole life?

Most of the time, we hear about whole life insurance and term life insurance. Whole life insurance is the original type of life insurance coverage, and it is meant to cover a person until they eventually pass away, and it does build up a cash value, though traditionally at very small interest rates. Term life insurance is very popular because the premiums are usually the most affordable, but once the term is over the policy does not usually have any value. So if a person survives a term life insurance policy that policy has no more value.

Life Insurance Plus Savings Plus Tax Advantages

So a new player on the life insurance scene was developed to compete with the other types of life insurance. Universal life insurance policies were developed to split out the cost of insurance (COI) and the cash value (CV) part of the policy, so each portion was clear to the policy owner. With whole life insurance, though it does have a cash value, the COI and CV are mixed together and not clear to the policy owner. Also, most whole life insurance policies usually return a very low interest rate on the CV, and so really were not considered good investments. Some newer types of whole life insurance may have been developed to answer this issue.

Excess Premiums Go To Cash Value

With Universal Life Insurance any excess premiums paid, over the amount to pay for the insurance, went to the cash value account. Equity Indexed Universal Life Insurance had a return on this CV that was tied to a major market index. The S&P 500, a major stock market index, is a very common example of this. In this way, the CV can grow at more market-like returns. With fixed or equity indexed Universal Life Insurance, the type sold by insurance agents and not financial advisors, some minimum market value is usually guaranteed. So these policies can provide near market returns, with a minimum of risk.

Universal Life Is Flexible

Furthermore, almost everything about universal life insurance is flexible. There will be a minimum payment to keep the policy in force, and that will be tied to the cost of insurance. However, beyond that, a policy owner may pay more to build their cash value, and even increase the face value of the insurance policy! The face value of the insurance policy also be decreased if an insured person’s needs change. That could happen when a mortgage is paid off or children leave home.

Because Universal Life is still life insurance, death benefits are usually paid to the beneficiary without a tax impact. Also, many times a low, or no interest loan, can be taken from the cash value while the person is still alive. In this way, Universal Life Insurance polices can provide a source of income if the cash value is great enough. Many small businesses even use universal life companies to fund retirement plans because of the advantages!

Because of the complexity of universal life, it is probably good to research the subject with a qualified insurance agent. I would also suggest comparing premium rates, because the cost of insurance can vary by company.

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Life Insurance

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