Universal Life Insurance Advantages
For policyholders who want flexibility and a greater level of control over the details of their policy, universal life insurance delivers several advantages compared with other forms of permanent life insurance.
The biggest advantage of universal life insurance is that it empowers policyholders to adjust the size and timing of their premium payments, reduce the size of their policy’s death benefit in exchange for greater cash value, and make other adjustments to adapt to their changing financial needs and different stages of life.
Advantages of universal life insurance include:
- More affordable than whole life insurance – Universal life insurance is usually less costly than whole life insurance.
- Flexible payment options – The policyholder can decide how much and when to pay – if at all!
- Adjustable death benefit – The death benefit can be reduced or increased depending on the policyholder’s needs.
- Guaranteed interest rate – Cash value is guaranteed to keep growing.
- Adjustable coverage for changing needs – Do you want a life insurance policy that can change with the times, or one that is “stuck in the past?”
More Affordable than Whole Life Insurance
Universal life insurance requires policyholders to take a more “hands on” approach to the management of their life insurance policies – it offers more flexibility, but also ensures fewer guarantees for the policyholder. For this reason, universal life insurance tends to be less costly per $1,000 of death benefit than whole life insurance, which is more of a straightforward, low-risk product that does not require extensive involvement or decision making by the policyholder.
Flexible Payment Options
With whole life insurance, premiums are fixed and are due on a regular schedule – policyholders pay the same amount on the same date each month. Universal life insurance affords a greater degree of flexibility – policyholders can choose how much to pay, and when to pay. Policyholders can pay extra premiums to increase the amount of their cash value, or skip payments when money is tight.
The cash value of a universal life insurance policy can also be used to pay premiums, as long as the cash value stays above a certain level. This makes universal life insurance a good option for people who have variable incomes – you can bulk up on premium payments when money is plentiful, and let the policy pay for itself during the leaner months.
Adjustable Death Benefit
With a whole life insurance policy, the amount of death benefit is guaranteed and is not able to be changed – no matter what a policyholder’s financial needs might be over the course of a long life, the death benefit stays the same as it was when the policy was first purchased many years ago.
Universal life insurance allows policyholders to adjust the amount of death benefit coverage up or down depending on their changing financial needs. Policyholders can reduce the death benefit and boost their cash value, or can increase the death benefit (as long as they qualify – increasing the death benefit often requires going through underwriting or completing a health exam).
Guaranteed Interest Rate
Universal life insurance has a bit more complexity for policyholders when compared with whole life insurance, but one aspect is the same: the interest rate on the cash value of a universal life insurance policy is guaranteed never to drop below a pre-defined level. This means that no matter what other changes the policyholder makes, the cash value will keep growing.
Of course, the policyholder still needs to keep making premium payments and avoid borrowing too much from the cash value of the policy. But as long as the policy is in force, the cash value is guaranteed to keep growing at a steady rate of interest.
Adjustable Coverage for Changing Needs
Consider a young married couple, age 25. They’re starting a family and want to get life insurance to protect their children. This couple might be highly risk averse in their choice of insurance – their first priority is financial protection. They buy a whole life insurance policy, thinking that this will give them the best mix of death benefit and guaranteed cash value
Fast forward 20 years. The couple’s children are almost grown and out of the house. Now the couple’s needs have changed – they no longer need as much financial protection as is offered by their policy’s death benefit amount, but they would love to have more cash value in their life insurance policy.
Unfortunately, their whole life insurance policy is “living in the past.” The policy is stuck with the features and coverage levels that they agreed to back at age 25, when they were in a very different stage of life. This couple illustrates the biggest single advantage of universal life insurance: it changes with the times. As your financial needs and life circumstances evolve, you can adapt your universal life insurance policy to change along with you.
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