What is universal life insurance?
Universal life insurance is a type of permanent insurance protection. This type policy is offered in most states.
Universal life insurance is different than term life insurance. A universal life insurance policy offers an individual not only the ability to have death benefit protection, but also the ability to earn interest on excess premiums. This cash value growth can be an excellent retirement planning alternative.
Cash values grow tax-deferred and can typically be accessed via withdrawal and loans tax-free.
Universal life insurance also is a very flexible tool to use when navigating the financial stages of life. The policy can be designed to keep premiums low and just guarantee death benefit. But, universal life insurance can do a whole lot more. See how using universal life insurance can be used during the stages of life:
Stage 1: Starting out
Bill and Judy are concerned about protection for Bill and their two small children if Bill dies. Bill is earning a modest income, and Judy is a stay at home mom.
Solution: Bill purchases a universal life insurance policy for himself, naming Judy as beneficiary. Bill chooses to pay the lowest premium required to keep the no-lapse guarantee of the death benefit in place. He’s not concerned with building significant cash value at this point in his life.
Stage 2: Saving
As their lives march forward, Bill is earning more money, and Judy is now working part-time. They decided to increase their payment into the universal life insurance policy to begin building cash value. They are thinking ahead to college expenses and funding their retirement.
Solution: They decide to increase their annual premium by double what they are currently paying. This is enough to begin building cash value toward a college fund, but not more than they can currently afford.
Stage 3: Empty Nesters
Both of Bill and Judy’s children are out of the house. Fortunately, due to scholarships and grants, they did not need to access the cash value in their universal life insurance to pay for college.
With retirement on the horizon, Bill wants a tax-preferred way to access cash before he starts accessing his traditional retirement plans.
Solution: They increase the premiums again on their universal life insurance plan. This builds even more cash value that they can use if needed. The policy continues to safeguard the death benefit for Judy, should Bill die first.
Stage 4: On her own
After 40 years, Bill dies. Judy receives the tax-free death benefit, now more than 3.5 times the total premiums paid.
Solution: Judy can use the death benefit to supplement her other retirement income, which now includes reduced social security benefits. (she will only recipient half of Bill’s benefit)
Is Term Life better than Universal Life?
Both type policies can fit in certain situations. Temporary needs are best suited for term life insurance. Sometimes it is hard to determine if the temporary need of today could actually be a permanent need of tomorrow.
There is no denying that term life insurance is typically the least expensive policy. But, what happens at the end of the term? Will you still want the protection? Has your health changed? Will you be able to qualify for new insurance at affordable rates?
Remember, once a term policy’s guaranteed period ends, premiums typically skyrocket higher.
What about using life insurance for college planning or retirement? Term life insurance cannot offer you tax-deferred cash value growth or tax-free withdrawals.
Are you a person that likes to invest and monitor your retirement dollars? Are you comfortable with risk that can be associated with the ups and downs of the market and economy? If not, universal life insurance could be a solution.
Universal life insurance cash values typically credit bond like returns. And although you won’t usually see the growth as you would in the market or with mutual funds, you also won’t experience the ups and downs of the market.
In summary, their is no wrong or right answer for if term insurance or universal life insurance is better. It really just depends.
Many times we have found that a combination policy of term insurance and universal life insurance works well in many situations.
Other uses for universal life insurance planning
Business executives- planning for retirement sometimes find that restrictions on qualified plan contributions limit their ability to plan for adequate cash flow after their working years.
A universal life insurance policy can provide flexibility in supplementing retirement cash flow with the ability to access cash value efficiently through withdrawals and loans.
Estate preservation- many individuals find that using low crediting assets to fund a life insurance policy can help preserve their estate for their children. As an example, a low paying CD that is not needed for retirement and will eventually be set aside for children can be moved into a universal life insurance policy.
By using the leveraging effect of the death benefit, the CD will immediately increase the size of his legacy dramatically. In addition, the death benefit will now be passed on tax-free.
Estate protection- Individuals with sizable estates can use the tax-free death benefit to protect a portion of the estate for heirs that might be subject to estate taxes or other taxes. This allows individuals the freedom to spend other assets in retirement and still be able to pass a portion of their estate to future generations.
Universal life insurance is a popular and very flexible policy that is used for a variety of planning situations. If you have questions or would like to look at the options that universal life insurance can provide, please contact us at 1-888-393-9003 or mike@specialriskterm.com
