Pros and cons of Universal Life Insurance

Universal life policies are extremely flexible. Because the insurance protection comes from either the accumulated cash value or the annual premium paid, if you don’t want to pay the premium, you don’t have to. You just need to be sure that there is sufficient cash value within the policy to cover the cost of insurance. The cost of insurance will then be deducted from the cash value. Certainly, the older you are, the more it will cost to pay for the insurance, so it’s important that there is enough in the investment account to cover this.

The amount of coverage can also be easily increased or decreased. Plus, you can change the policy from a level benefit type to the cash value plus a specified death benefit. If you choose to increase the coverage, you will generally be asked to prove insurability again. But you won’t need to do anything if you are decreasing the amount of coverage.

This flexibility makes a universal life policy very attractive. The policy can change with you as your needs change. For example, when you get older and aren’t in need of as much insurance protection, you can decrease your coverage. Or, if you don’t want to pay your premium and want to use it for something else, you don’t have to worry about your policy lapsing because the cost of insurance will come from the investment account.

However, the flexibility of the premium payments is also a drawback. If you were to economize on your premiums early on in the life of the policy, you may find that in the later years of the policy, you will be subject to larger-than-anticipated premiums. Plus, if the interest rate declines, the investment account may not grow fast enough to cover the cost of insurance. Also, just because there is flexibility with the payment of premiums, that doesn’t mean that at some point the premiums would disappear. Usually, the premiums never disappear. Even if they did, they would probably reappear once the interest rates declined to the point where they wouldn’t cover the cost.

Check to see what the guaranteed interest rate is before you purchase your policy. Typically, policies will state that they pay current interest on policies. This could be five or six percent, as compared with the guaranteed minimum of, say, three percent. It’s important that you know what the policy’s interest rate is tied to. Many times, the interest rate for policies is that of the 90-day Treasury bill.