Life insurance, as you’re probably aware, is a form of insurance policy meant to pay out a set amount to your named beneficiaries upon your death. The hope for most people is that they can replace the income they would have otherwise brought in. This could save their family from losing a home, or it could provide the funds to put kids through college, just for example. In some cases, those who take out life insurance policies merely want to make sure their loved ones aren’t on the hook for end-of-life expenses. But choosing a life insurance policy isn’t as easy as picking a number for your payout. There are several different types of policies to choose from, and many of them seem the same at first glance.
Many people assume that universal and whole life insurance policies are the same because they are both permanent life insurance (as opposed to term). In truth, they do share similarities, namely that once you start your policy, you will keep your coverage until the day you die, so long as you continue to make your payments. In addition, both allow you to contribute some portion of what you pay or what is earned through investments made by the insurance provider to a savings account attached to the policy. But these policies also differ in a number of key ways that may cause you to prefer one over the other.
The biggest draw when it comes to universal life insurance is that the policies tend to be more flexible – universal policies are sometimes referred to as “adjustable” life insurance. For example, once you have paid your first premium, you have the option to increase or decrease your death benefit (within limits). With a whole life policy, your death benefit is locked in unless you wish to renegotiate for a new policy.
You can also change your payment structure at any time when you choose universal life insurance instead of whole life. Whether you want to pay monthly, annually, several years in advance, or change your payment frequency from year to year doesn’t matter, as long as you pay on time. And you can change the amount you pay in, as well. Since this type of policy not only has a death benefit, but also a cash value attached (part of your premium goes to pay for your death benefit and the rest is applied to a savings/investment account), you can contribute more to the cash value if you so choose. Like IRAs, for example, there are limits to the amount you can put into this account annually. But unlike IRAs, you can back-fund indefinitely, maxing out every annual contribution limit after the fact.
The best thing about this type of policy, though, is that you can use excess funds in your savings portion to pay for your premiums. And once you fund the savings to a certain point, it’s possible that the interest you’re earning alone could pay your insurance premium. This is also a great option if you fall on hard times and you’re struggling pay premiums. You can use any and all of the money in your savings portion to keep your policy intact instead of letting it lapse. You can also take out loans against the cash value.
There are even more ins and outs to this type of policy, and it’s important to understand how the interest rate for your account works since dipping rates could mean you have to pay a higher premium to sustain your account. But there are plenty of advantages to draw you to a universal life insurance policy. It’s definitely an option to consider when you’re looking for permanent life insurance.