Life insurance is one of the most effective ways that you can ensure your loved ones will be taken care of even after you’re gone. But, there are many different types of life insurance, and each provides you and your beneficiaries with different benefits.

Universal life insurance is often popular because it provides a guaranteed death payout, no matter when you pass away. Is it the right life insurance product for you, though? Let’s take a look at all that universal life insurance entails.

What’s Universal Life?

Like all types of life insurance, universal life provides a death payout to your named beneficiaries when you pass away. Unlike many other forms of life insurance, though, universal life provides this payout no matter when you die.

This is why it’s referred to as universal life insurance: It covers you for your entire life. This may sound very attractive, as you’ll never have to worry about outliving the term of your life insurance policy. You can rest assured knowing that no matter what age you pass away at, your beneficiaries will receive a payout.

Because of this, many people treat universal life insurance as an alternative savings plan. The premiums that you pay for having the universal life insurance will essentially go toward the eventual death payout of the policy. What’s more, if you’ve built enough cash value, many universal life insurance policies will allow you to cash some of it out, just as you’d be able to do with another savings account.

Does Universal Life Diff from Other Life Insurance Policies?

Universal life insurance policies work slightly different than other types of life insurance policies. When you pay your monthly premium, half of it will go toward covering the cost of the life insurance, while the other half will go into an investment and savings portion.

The nice part about universal life insurance policies is you will be able to choose the amount of premium you pay, as long as it’s within a range. The insurance company will set a minimum premium to cover the life insurance cost.

Then, you can add money to this monthly premium that will contribute to the plan’s cash value. The nice part about this is the insurance company will set a minimum annual interest rate that you’ll receive in return, and your returns could be even greater than that if the market performs well.

A lot of people who invest in the cash value portion of a universal life insurance plan will contribute the maximum allowable by the IRS for the years after the plan is opened, and then use the cash value it’s built to pay for the life insurance premiums as they age.

Three Types of Universal Life Insurance

There are three main types of universal life insurance: guaranteed, variable and indexed.

Guaranteed Plans

With guaranteed plans, the premium you pay will always remain the same. This is nice for cost certainty, but the trade-off is the interest rate on your returns will be set at the start of the policy.

You’ll just need to pay your monthly premium, and it’ll provide you coverage for the remainder of your life. As a result, it is considered the universal life insurance plan with the least amount of risk.

Variable Plans

Variable plans will allow you to take the cash value of the plan and invest it in mutual funds. This is a nice aspect of the plan, as it allows you to control the cash value part of your universal life insurance plans.

Mutual funds are a solid investment vehicle, since they’re relatively low risk with decent returns. There are fees associated with investing in these mutual funds that the insurance company will charge that could reduce your returns.

Indexed Plans

Indexed plans have their cash valued tied to a popular stock index such as the S&P 500. When the stock market performs well, your cash value will increase as well. This is nice, as it provides you the opportunity for even greater returns on your cash value, allowing you to maximize the overall value of your universal life insurance plan.

The trade-off here is that the insurance company will take a fee out of these returns. What this means is the cash value in this plan will often result in lower returns than if you invested in a stock index fund on your own through a separate investment account.

Are Universal Life Insurance Plans Worth It?

While there are some trade-offs to universal life insurance plans, including the cash value aspect, there are huge upsides, too.

Perhaps the most important is that a universal life insurance plan provides you peace of mind as you know your loved ones will always be taken care of long after you pass. Unlike other life insurance plans, universal life will trigger a death payout when you pass away, no matter how old you are.

In addition, the flexibility they provide with the cash value investment aspect is a huge benefit of universal life insurance. There are certainly other investment types that could perform better, the hybrid aspect of universal life insurance is a very attractive feature to many people who are looking to grow their money while protecting the interests of their beneficiaries.

Work With an Experienced Financial Advisor

Our knowledgeable financial advisors at Good Life Financial Advisors of Mt. Pleasant can provide the tools and guidance to help you plan your estate’s finances for your family’s future. Contact us today to speak to our experts.

Disclaimers

This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contact your insurance agent. Guarantees are based on the claims paying ability of the issuing company.