Previously published in FINE Magazine
In the first article of our series, we explored the differences between term life insurance and permanent life insurance.
Simply stated, the most distinct differences between the two involve longevity. Term life insurance offers coverage for a limited period of time, whereas, permanent life insurance provides coverage until death.
Naturally, each life insurance plan poses its own strengths and weaknesses. Term life insurance is the least expensive of the two and the most appropriate when solving short-term liquidity needs. However, the downside to this terminable insurance policy is that if the insured outlives the policy, there will be no death benefits to claim.
On the contrary, permanent life insurance is ideal for long-term planning; providing coverage until death and doubling as a tax protected investment vehicle. However, because of the security and financial benefits of this promising insurance policy, it can be very expensive.
Many times, the most suitable insurance policy for you may not lie at the polar ends of the spectrum, but rather somewhere in between.
Universal Life Insurance: It’s not too hot, it’s not too cold, it’s just right...
Universal life insurance provides the benefits of being a permanent policy with added flexibility.
What can be adjusted in a universal life insurance policy?
Death Benefit: The face amount received at the time of the insured’s death
Premiums: The amount paid for the insurance
Savings Element: The vehicle of investment for the cash value portion of your policy
… however, because of this flexibility, it is important to be cognizant of the technicalities that come with the many options.
Top 3 options when shopping for a universal life insurance policy: variable, fixed & indexed
- Variable: If you have a taste for the benefits and volatility of the market, a variable product may be a good fit. Variable universal life insurance allows you to invest the cash value of your policy in investments, like mutual funds & stocks. Variable products are only available for purchase through a licensed securities agent.
- Fixed: If you do not wish to endure the ups and downs of the market and prefer a more predictable product, fixed products may be the best investment for you. These products provide a fixed rate of growth, which protects you from market fluctuations, but limits your potential earnings. Keep in mind, fixed policies are typically subject to the risk of the insurance company’s performance and factors.
- Indexed: Indexed universal life insurance is often pitched as the best of both worlds; providing consistent, moderate to high growth through investments in index funds. This type of policy will typically reflect broad market indexes like the S&P 500, DJIA, etc., therefore garnering less risk.
A final factor to consider when choosing universal life insurance is the concept of guarantees. While the right universal life policy can be fruitful, it is critical to look closely at the fine print for details including participation rates, sequence of returns, lack of dividend payouts and caps before purchasing. Often, due to the flexibility that universal life insurance provides, there is more room for confusion.
In summary, universal life is an ideal choice for those looking to leverage the death benefits of a term life policy with the cash value of a permanent life policy, with added flexibility. This flexibility can provide the opportunity to customize your policy with varying payments, investment strategies and levels of risk.