Part 1: What is Universal Life Insurance, How Expensive Is It, What Is The Cash Value
Part 2: Advantages and Disadvantages of Universal Life Insurance, Should You Buy Universal Life Insurance
Introduction to Universal Life Insurance for Kids and Teens
This video explains the concept of Universal Life Insurance in a simple, concise way for kids and beginners. It could be used by kids & teens to learn about Universal Life Insurance, or used as a money & personal finance resource by parents and teachers as part of a Financial Literacy course or K-12 curriculum.
Suitable for students from grade levels:
- Elementary School
- Middle School
- High School
The topics covered are:
- What is universal life insurance
- How expensive is universal life insurance – how is the premium decided
- More details about the cash value
- Pros / advantages of universal life insurance
- Cons / disadvantages of universal life insurance
- Is universal life insurance right for you – should you buy it
What is universal life insurance?
Universal life insurance is a type of permanent life insurance that guarantees payment of a pre-agreed amount, called the death benefit, to the beneficiaries stated in the policy, if the policyholder dies after buying the universal life insurance. This is in exchange for periodic payments, called premium.
In addition to the death benefit, universal life insurance also has a savings component, called cash value, where money grows on a tax-advantaged basis.
The key features that distinguish universal life insurance from other permanent life insurance (like Whole Life Insurance) are the relatively lower premiums and the flexibility around the premiums and death benefit.
How expensive is universal life insurance? And how is the premium decided?
Universal life insurance premiums can be anywhere from around a hundred dollars to upwards of a thousand dollars per month. This is because the premium varies a lot based on different factors like your age, gender, health, existing illnesses or disabilities, and the policy amount.
For example, Lisa, a healthy 25 year old, who is covered for $300,000 will pay much lower premiums than Larry, who is 50, has diabetes, and is covered for $500,000.
In universal life insurance, the premiums aren’t fixed and usually go up over time based on factors like age and health condition.
Can you tell me a little more about the cash value?
The premium you pay for universal life insurance is split into 2 parts: the actual cost of insurance (COI), and the savings component, which is also called the policy’s cash value.
The cash value earns tax-deferred interest based on the current market rate or the minimum guaranteed rate, whichever is higher – allowing the cash value to increase over time.
This cash component can be accessed by the policyholder during their lifetime as withdrawals or loans, as needed.
For example, people can use this money as an emergency fund or to help them live in retirement. However, the loans need to be paid back with interest, and any withdrawals or unpaid loans reduce the death benefit.
The cash value can also be utilized to partially or fully pay the premiums, without impacting the death benefit.
What are the advantages of universal life insurance?
One big advantage of universal life insurance is that it lasts for the entire life of the policyholder without the need for any renewal – unlike term life insurance. It comes with a guaranteed payout to the beneficiaries as long as the premiums are paid.
Another advantage is that it has a cash value that grows tax deferred and serves as a pool you can dip into for future premium payments, or for loans or withdrawals if the need arises. If the market performs well, the cash component growth can be significantly higher than whole life insurance.
Also, for permanent life insurance with a cash component, it’s less expensive than whole life insurance.
Another huge benefit is the flexibility it offers with respect to premiums – there is generally a range for premiums, and as long as the minimum amount is paid, the policy doesn’t lapse.
This range also allows people to pay more in the initial stages, as anything over the minimum goes towards the cash value, allowing it to grow faster. Universal life insurance also allows the death benefit to be changed, if the policy holder so desires.
Are there any disadvantages of universal life insurance?
The biggest disadvantage of universal life insurance is its high cost. Even though it is less expensive than whole life insurance, it’s still a lot more expensive than term life insurance due to the savings component.
Also, unlike whole life insurance, the premiums go up over time based on age and health conditions.
While universal life insurance guarantees minimum returns on the cash value, this minimum is quite low. Any return over this minimum depends on the market conditions and is unpredictable.
Another huge yet often overlooked disadvantage is that the beneficiaries only receive the death benefit, and not the cash-value – any remaining cash value goes back to the insurance company.
Also, if there are outstanding loans or withdrawals by the policyholder during their lifetime, the death benefit could be considerably reduced.
Should I buy universal life insurance?
Universal life insurance is a cheaper alternative for someone looking for lifelong coverage, or is interested in the tax advantaged aspect of the cash component and would like more flexibility with regards to premiums and death benefit.
But, since universal life insurance is significantly more expensive than term life insurance, it may not be the right choice for you if you don’t need lifelong coverage or flexibility.
If you are a disciplined investor who can make good choices regarding investments, you can use a strategy called “buy term and invest the difference”. Like the name suggests, you buy term life insurance instead of universal life insurance, and invest the money saved in premiums.
This way, not only will you pay less for the insurance, but you will also be able to invest on your terms to maximize returns.