How much is universal life insurance?
Term life insurance simply provides a death benefit to your beneficiaries, not a cash value component like universal life insurance does. Up to the policy’s expiration, you choose a payout amount and make installments. If you decide on a 20-year policy, for instance, the death benefit is only valid during that time period, providing your policy is still in effect.
A term life insurance policy is easier to comprehend because it simply provides a death payout. Universal life, on the other hand, allows you to modify your death benefit at any time during the policy’s term and offers variable premiums. It might also be a better choice for people who want to incorporate life insurance into their investment plan.
However, term life insurance is probably a better choice if you’d prefer to pay fewer premiums and buy a plan that supports your dependents.
Due to the cash value element, universal life insurance policies are more expensive than term life insurance. This holds true throughout your entire life.
According to Glenn J. Downing, CFP and principal of CameronDowning, “You overpaid the cost of insurance in earlier years to accumulate cash in the policy.” “In later years, you pay less for insurance, and the cash value makes up the shortfall.”
Your premium payments for all types of life insurance will be influenced by your age, health, and way of life, among other things.
Take the case of a 20-year-old man who does not consume alcohol or tobacco and wants to buy a term life insurance policy with a $100,000 death benefit. Most of the time, your premium will be far less than that of a 50-year-old man who has smoked consistently for the previous 20 years. This is because the 50-year-old is charged a higher insurance premium because the insurer considers him to have a higher health risk.
In contrast, rates for universal life insurance policies will change according to how well the assets in the cash value component perform. If you save a lot of money, you can put some of it toward your insurance costs.
By changing insurance, you might be able to save money. To find out more, view our rankings of the cheapest life insurance providers for 2023.
How much universal life insurance do I need?
How much your beneficiaries rely on your income will determine how much universal life insurance you require. To determine how much you would need for your death benefit, John Fisher, CFP, vice president of GCG Financial, advises starting with general guidelines.
When summing up all of your debt, he advises, “you can calculate numbers like seven to ten times your income to see what you come up with.”
Fisher emphasizes that you should consider both your current expenses and the money you would lose when you leave. When calculating your death benefit, he advises taking into account things like paying for college and how much you believe your loved ones would need to replace your income.
You should also think about how much you want to put into the policy’s cash value. Whether you have alternative investment vehicles and accounts that support both short- and long-term financial objectives will affect how much. It’s a good idea to get the advice of an unbiased financial expert when determining how much life insurance you require. This expert will examine your goals and present financial condition before making a recommendation.
Is universal life insurance a good investment?
Depending on your financial objectives, universal life insurance may be a wise investment, according to Downing and Fisher. It takes time for the cash value component’s value to grow because it is a long-term investment.To put it another way, it’s a wise investment if you desire a long-term wealth-building account.
Fisher also advises thoroughly examining your objectives to see if your program is adequately funded.
The largest problem, according to him, is that clients’ universal insurance policies have too high death benefit or lack a defined objective. It’s crucial to determine whether the policy’s objective is to build up cash value or to offer a lifetime death benefit.
In other words, if you make sure you’ve funded the account appropriately to build up enough cash value for you to spend over your lifetime, universal life insurance can be a beneficial investment. This calls for you to consider your desired retirement date, the size of your current cash reserves, and the diversification of your portfolio through the use of additional investment vehicles.
Downing advises also considering how your investment may affect your taxes. For instance, if you choose to leave your job early and want to take a cash value withdrawal until you can take a withdrawal from your qualifying retirement plan, that sum will be taxed.
“If someone withdraws money from a policy, the gain over basis comes out first, fully taxable, at ordinary income rates,” he claims. “The basis then becomes tax-free.”
Who should consider universal life insurance?
For people with long-term insurance needs and the means to cover the cost of one, a universal life insurance policy is the ideal option. For instance, it makes sense to use extra money to fund a universal life insurance policy if you have lots of liquid assets in your emergency fund and money in retirement accounts.
However, a term life insurance policy is probably a better option if your only concern is giving your spouse and children a replacement source of income. Or, if you don’t have enough money to invest further, it would be wiser to wait and put what you do have into your employer-sponsored plan instead, as you might be able to benefit from company contributions.
According to Fisher, you can “layer” your policies by buying various forms of insurance to take into account different life stages if you anticipate your death benefit requirements changing. For instance, you and your spouse have decided that you need a $1 million life insurance coverage because you both currently have a mortgage and a young child to take care of. The majority of the money required for 20 years, or whenever you suppose your mortgage is paid off and your child graduates from college, can be covered by term life insurance. The balance will go toward your estate’s final expenses.
In this manner, you can plan for your demise and invest without having to spend too much for a universal life insurance coverage in your latter years.