The Pros and Cons of Universal Life Insurance
The biggest advantage of universal life insurance over other forms of permanent life insurance is that it delivers the greatest flexibility and freedom for policyholders to change their premium payments, adjust the size of their death benefit or cash value, and adapt their policies to meet their changing financial needs. The challenge of universal life insurance is that it requires policyholders to assume a greater degree of risk and responsibility for maintaining their policies and ensuring that there is no lapse in coverage due to unpaid premiums – greater freedom brings the need for greater vigilance.
Universal Life Insurance Pros
Flexible Payment Options
Universal life insurance policyholders can decide (with some limitations) the timing and size of their premium payments. Policyholders can pay additional premiums to build up their cash value, or skip premiums to conserve their cash. A universal life insurance policy’s accrued cash value can also be used to pay premiums, as long as the cash value does not fall below a certain level.
Adjustable Death Benefit
Universal life insurance gives policyholders the option to reduce their death benefit and boost their cash value. This can be a valuable feature as policyholders’ needs change during the course of their lives – for example, a 30 year old person with young children might want a larger death benefit to provide greater protection for his family, while a 55 year old whose children have grown might want to reduce the death benefit to boost the cash value for retirement savings.
More affordable than whole life insurance: Universal life insurance tends to be less costly than whole life insurance per $1,000 of death benefit. One reason why the costs are lower is that there are more responsibilities and risks for the policyholder – universal life insurance is more of a “hands-on” product, while whole life insurance takes most of the decision making out of the hands of the policyholder.
Guaranteed Interest Rate
The cash value of a universal life insurance policy is guaranteed to grow at a certain interest rate that will never fall below a pre-defined level. This is a benefit for the policyholder, since even though universal life insurance has certain risks, the cash value is guaranteed to grow as long as the policyholder doesn’t draw down the cash value to take loans or pay premiums.
Adjustable Coverage for Changing Needs
People have vastly different insurance needs at different times of their lives – but typical whole life insurance does not allow policyholders to make any changes to their insurance coverage. Whole life insurance is “set in stone” from the moment the policy documents are signed – no matter what changes in health, family circumstances or financial status the policyholder encounters over the next fifty years, his life insurance policy will not be able to change to reflect the changes in his life. Universal life insurance gives the policyholder the ability to choose a higher death benefit or a higher cash value depending on what makes sense for each stage of life.
Universal Life Insurance Cons
Freedom Requires Responsibility
One challenge of universal life insurance policies is that some policyholders aren’t able to handle the freedom. Without the discipline of having to make regular premium payments, some policyholders skip too many payments and end up having a lapse in coverage – which can lead to additional fees, inconvenience or even a denial of benefits. For this reason, many universal life insurance policies offer “No Lapse Guarantee” riders and other optional add-ons to the policy for additional security.
A Complex Product for Savvy Policyholders
Universal life insurance is a more complex product than whole life insurance – which is why universal life tends to be less expensive; some of the burden of managing the policy is shifted from the insurance company to the policyholder, and so the insurance company charges less. People who just want a basic insurance product that they don’t have to spend time maintaining might be better off with whole life insurance.
Non-Guaranteed Cash Value
Universal life insurance does not have a guaranteed cash value – unlike whole life insurance, where the cash value is guaranteed to only increase with time. The cash value of a universal life insurance policy can decrease over time if the policy holder skips too many premium payments – resulting in a drawdown of the cash value balance.
Easy to decrease death benefit, not always easy to raise it: Many universal life insurance policyholders choose to decrease the level of their death benefit in order to boost their cash value or lower their premiums – but keep in mind that it is not always so easy to raise the death benefit back to a higher level. When policyholders want to raise the level of their death benefit, they might have to go through underwriting questions or a medical checkup to make sure they are not at high risk of health problems.
Universal life insurance is meant to be a flexible product for policyholders who want more “hands-on” control over their insurance policy, with options to adjust the death benefit, boost the cash value, and make premium payments on the schedule that is best for them. Policyholders who want more of a “plain vanilla” permanent insurance policy might be better served by choosing whole life insurance.
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