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"What is Universal Life Insurance

We can help with all your insurance needs including LIFE INSURANCE. We have access to all the top rated companies, and their best policies. We received a letter from M. Baker who wanted to know if universal life insurance was the best way to go. To answer his question I decided to put together the best explaination about universal insurance for you.

Along with providing a death benefit, universal life insurance also incorporates a savings vehicle. In short, it is like combining a term life insurance policy with a tax-deferred interest accumulating savings account.

One benefit of purchasing a universal life insurance policy is that besides accumulating a tax-deferred savings, one may not have to pay premiums during the entire policy. If money to pay the death benefit and other related costs accumulates in the tax-deferred savings portion of the policy, then premiums may eventually not be required to keep the policy in force.

So who could benefit from a universal life policy? Since a universal life policy is an investment vehicle along with a life insurance policy, only people who feel they need life insurance into their 70's would benefit from a universal life policy. This would give the savings portion enough time to possibly accumulate into an investment. Most persons will not need life insurance that late in life, and in the case life insurance is not needed that late, it may be more beneficial to purchase a term life insurance policy and plan a proper retirement investment savings account such as a 401K or annuity.

If a universal policy looks right for you there are a few important points to remember. First, make sure you plan to have the policy long term since you will need to have the policy in force at least 15 years to be eligible for any return of the policy. Second, make sure you have a knowledgeable insurance agent to review your other options such as term and whole life insurance.

Investment specialists define Universal insurance as:

A type of flexible permanent life insurance offering the low-cost protection of term life insurance as well as a savings element (like whole life insurance) which is invested to provide a cash value buildup. The death benefit, savings element and premiums can be reviewed and altered as a policyholder's circumstances change. In addition, unlike whole life insurance, universal life insurance allows the policyholder to use the interest from his or her accumulated savings to help pay premiums.

With permanent insurance, your premium stays the same as long as you own the insurance, up to age 100. That way, you shouldn’t be in a situation where it becomes too expensive as you age. Initially you pay more than the raw cost of insurance and that money is kept in reserve. Once the raw cost of insurance is greater than your premium, the difference is taken from the reserve.

The difference between Whole Life, Universal Life and Variable Universal Life has to do with the return you earn on that money while it’s kept in reserve. Whole and universal essentially pay interest while variable universal allows you to ‘invest’ that reserve in mutual-fund-like accounts.

On the surface, it may seem that there shouldn’t be a lot of difference between the premium on 20-year term and a universal policy with the same death benefit. But let’s look at some real numbers. The annual premium for a 45-year old man in excellent health for $1,000,000 in coverage is $1400 per year for 20-year term. That man would pay roughly $8,000 a year for permanent insurance. That’s right—about $6600 more every year.

That reserve in the permanent insurance can become a substantial over time, so they give you the ability to borrow the money held in reserve. This has spawned the use of permanent insurance for needs other than the death benefit, such as a way to build a retirement nest egg. The ‘ploy of the day’ is that you should take all the equity out of your home and put it into a universal life insurance policy because it will allow you to build your wealth more quickly. (I expose the fallacy of that argument in a future article.)

What your insurance agent isn’t going to tell you is that the commission on permanent insurance can be around 70% of the first year premium and then maybe 5% a year on additional premiums. Commissions on first year term premiums can be as high as 100%. In our example above, the agent will make about $5600 on permanent versus only $1400 on the term. This higher commission is a tremendous incentive for agents to sell permanent insurance instead of term.

The result is a huge conflict of interest between the needs of the client and the desires of the agent. I would like to think that every agent will always do what’s in the client’s best interest, but we know that’s not the case. And most agents are convinced that term is a waste of money and that permanent life insurance is the better choice. I don’t.

I believe that permanent life insurance should only be used in special situations, such as to cover estate taxes due at death. I do not think it should be used when you want to provide for your family in the event of a premature death. I don’t think it should be used as a way to ‘build wealth’ or as a type of retirement plan. In my next article, I’ll explain why.


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