There are a few disadvantages of universal life insurance you may want to know if you’re considering buying universal life insurance.
As with any life insurance, you should have all the information you need to make an informed decision, especially if it’s a permanent life insurance product.
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The Disadvantages of Universal Life Insurance
There are three things you should be aware of before making a long term life insurance plan:
1. Universal Life Has A Sensitivity To Cash
The cash element to universal life insurance is not the same as whole life insurance. With whole life, there is a guarantee with the cash growth, and it should continue to grow as long as premiums are paid.
Universal life insurance cash value will decline in the long run, but this is supposed to happen. Unfortunately, if you access your cash for any reason early on in the policies life, you’ll be diminishing the stablility of the policy unless you pay it back with any loan interest required in a timely manner. This will make the cash value decline much faster than it should.
2. Universal Life Insurance Can Lapse If You’re Not Careful
If the policy does have a diminishing cash value, due to loans for example, the policy can lapse before you need to make a claim.
Should you choose a poor policy from a non-reputable company, you also risk lapse simply due to the bad performance of the company. If the company’s portfolio backing the policy is under performing for a long period of time, your policy could lapse even if you never took a loan.
3. Term Life Versus Universal Life Premiums
WIth a term life insurance policy, you pay a certain premium for a certain period of time, and the contract is for a specific insurance death benefit.
Universal life insurance will have a longer duration if it’s used properly, but you’ll have to pay a higher premium in order to do so. While this may be advantageous if you need coverage for a longer period of time, if for any reason you choose to surrender the policy, you’ll lose far more money having bought a universal policy than term. If you have health issues and wondering if you would qualify, there are guaranteed issue life insurance policies available for you.
Universal Life Cash Value
Perhaps the most crucial component you need to understand about universal life insurance is the cash value within the policy. While every universal life policy is constructed different, they all share the same practice when using cash value to fund the policy in the later years. There is greater cash value build up in the beginning in order to pay the additional and increasing amount of insurance cost down the road.
The reason the cash value is high in the beginning yet diminishes over time is simply to give the consumer a level premium payment over the life of the product.
Because of this, it is absolutely crucial to fund the policy correctly. If you do not, you severely reduce your chances of keeping the contract in force for as long as you originally planned.
Universal Life Insurance Basics
There are a few main reasons why someone might want to buy a universal policy:
- Permanent Coverage. You know you will need life insurance to pay off bills, replace an income to a spouse (especially if you lose pension income), or leaving a legacy to your children.
- Estate Conservation. You have a significant estate and you will require substantial and immediate cash to settle your estate without having to pawn off assets at under valued prices.
- Charity. You simply want to leverage your dollars now in order to leave a lump sum to a charity upon your passing. This is common to institutions like churches and universities someone has had a long relationship with.
Once the reason is determined, it’s time to more fully understand the concept of funding a universal life insurance policy correctly. Let’s briefly talk about the simple basics of how a universal policy works, and why it is constructed the way it is.
As mentioned above, the idea of universal life insurance is to have a permanent death benefit, and the lowest, stable premium payment. It’s basically the same as term insurance, but generally applies where someone is looking to go beyond the coverage period of a term policy.
In order to do this, the insurance company has to take in a higher premium amount than term life insurance, and the difference is put into a cash value. The cash value is attributed a certain amount of interest, and the cash grows steadily in the early years.
As your age increases, your cost of insurance is increasing as well. At some point, your premium will no longer be able to pay the cost of insurance, so the remaining balance is taken from the cash value within the policy. If you don’t have enough cash value to offset the premiums you’re paying and the cost of insurance required, you have a lapse situation.
No Lapse Universal Life Insurance
As consumers are less and less willing to accept a long term contract with a possibility of it imploding, insurance companies have begun to alter their universal life insurance policies in order to build in more guarantees and more stability.
There are different types of guarantees associated with universal life insurance, and they vary based on the age in which they will guarantee the product. For example, you can buy a no lapse guaranteed universal life insurance policy to age 90, to age 100, or even to age 121. Obviously, as the age goes up, so does the premium.
But even the guarantees can be very sensitive. In some cases, if you make any late payments, the guarantee may no longer be valid because you didn’t hold up your end of the deal by always making on-time payments. But don’t shy away, these new guarantees are a new level of stability because the insurance companies had to reconstruct their policies in a manner to last longer. It would not be in their best interest to have to pay a claim on a guaranteed product if the policies were under funded for many years.
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Term Life Insurance – The Alternative
Now that you’ve seen the advantages and disadvantages of a universal life insurance policy, you might be looking for an alternative to get life insurance coverage. There are several other options that you can choose from, but they most common is a standard term life insurance policy.
These policies are bought with a pre-determined expiration date with them, and once that date has passed, you’ll no longer have insurance coverage. Because they are not a permanent form of coverage, term insurance plans are going to be more affordable than other life insurance options. If you’re wanting to get the cheapest life insurance available, a term insurance plan is going to be the best way to go.
One of the biggest advantages of term insurance plans is that you can buy a plan that matches the length of your insurance needs. For example, maybe you just had a child or you’ve just purchased a new house, then you can buy a life insurance policy that will give your family the protection that they need. Unlike a permanent life insurance policy that will continue to give you coverage long after that.
No matter if you need $100,000 a million dollar insurance policy or life insurance during your pregnancy, we can answer your questions and help you get the coverage you deserve. Unlike traditional insurance agents, we are independent insurance brokers, which means we can bring all of the best insurance plans directly to you. Regardless of which type that you choose, either a universal life insurance policy or some of the other options, it’s important that you compare dozens of quotes before you decide which kind is going to work best for you.
Instead of wasting your time calling dozens of companies yourself to get quotes, let our agents do all of that hard work for you. We can help save you both time and money on your life insurance search. We know that shopping for life insurance isn’t a fun process, but our agents are here to help.
Just be sure to read all the fine print when it comes to the no lapse guarantee. You won’t want any surprises here.
Because you never know what’s going to happen tomorrow, you shouldn’t wait any longer to get the insurance coverage that your family deserves. If something were to happen to you, and your family didn’t have life insurance coverage, they could be left with a mountain of debt, which is going to make the situation a thousand times worse, but that’s where your life insurance comes in. If you have any questions about universal life insurance or the other options available to you, please contact one of our agents today. We would be happy to answer those questions and connect you with the best plan possible.