Universal Life Insurance.You Should Know About. Universal life insurance is another type of permanent life insurance. The main difference between universal life and whole life insurance is that universal life gives you more control over certain aspects of the policy. This is mostly related to the investment portion of the policy which I’ll explain more later.
To help you better understand universal life insurance, here are 10 things you should know:
1. It’s permanent.
Universal life is one of several types of permanent life insurance. It never expires unless you cancel the policy or do not pay the premiums. This makes it more expensive than term life insurance since the insurance company knows that they will eventually have to pay out money.
2. It has an investment (savings) account built in.
Your insurance premiums go to three separate parts of you policy: the life insurance, fees, and investments. The investment part of the policy is like a savings account that grows over time and it usually grows tax free like an IRA (or RRSP in Canada). This savings is called the cash value of the policy.
3. You have some control over the investments in your policy.
This is what I was referring to at the beginning of the article. With whole life insurance your savings is put into a relatively low interest bearing investment. With universal life insurance, you can decide what your savings is invested in among several choices provided by the insurance company. These options usually include savings accounts, guaranteed term deposits, and investment funds (which are similar to mutual funds).
4. There are 3 ways to access the savings in your policy.
Since the savings grows tax free in the insurance policy, you may have to pay taxes when you take money out.
5. Taking money out of your policy may reduce the death benefit.
The death benefit is the amount of money owed to the beneficiary of your life insurance policy when you pass away. Universal life insurance policies vary on this point. You would need to read your policy or ask your insurance company or agent to be sure.
6. The investment savings may be lost when you pass away.
This is also something to discuss with your agent or insurance company. With whole life insurance, the savings is almost always kept by the insurance company when you pass away. But with Universal life insurance, you often have an option to have both the life insurance and the savings paid out. Be sure to discuss this with the insurance company. You want to be sure that the savings aren’t lost when you pass away.
7. If you can’t pay your premiums, the insurance company will use the money from the savings to keep the insurance policy in effect.
This will keep going until all of the savings are used up or until you start paying your premiums again. If the savings are used up, your policy will usually be cancelled.
8. Your insurance premium goes to three different things.
Universal life policies usually break down how much each portion is costing you. So if you’re paying $100 a month for your policy, that $100 is paying for three things.
9. Universal Life Insurance usually has higher fees and administration costs than term life insurance.
Insurance companies and agents make good money from selling universal life insurance and this money comes from the fees you pay. One thing that’s nice about universal life insurance compared to whole life insurance is that the fees and administration costs are disclosed to you so you can see exactly how much it’s costing you.
10. Pay attention to how the mortality charge is set up.
This is usually done in one of two ways.
Pros – when you’re younger and the mortality charge is smaller, more of your premium will be going into investments and you can take advantage of time to grow your money.
Cons – as you grow older, the mortality charge could potentially become more than your total premium. If this happens, the insurance company will start taking money from your savings to make up the difference. For example – Say you pay $100 a month for your policy. When you’re 30 years old, the mortality charge might only cost $30 per month. That means that $70 a month is going into the investments and paying for fees. But by the time you’re 65, the mortality charge might be $125 a month. If you still only pay $100 a month for the policy, it means that the insurance company is taking $25 a month (plus some extra for fees) out of your savings.
To help you better understand universal life insurance, here are 10 things you should know:
1. It’s permanent.
Universal life is one of several types of permanent life insurance. It never expires unless you cancel the policy or do not pay the premiums. This makes it more expensive than term life insurance since the insurance company knows that they will eventually have to pay out money.
2. It has an investment (savings) account built in.
Your insurance premiums go to three separate parts of you policy: the life insurance, fees, and investments. The investment part of the policy is like a savings account that grows over time and it usually grows tax free like an IRA (or RRSP in Canada). This savings is called the cash value of the policy.
3. You have some control over the investments in your policy.
This is what I was referring to at the beginning of the article. With whole life insurance your savings is put into a relatively low interest bearing investment. With universal life insurance, you can decide what your savings is invested in among several choices provided by the insurance company. These options usually include savings accounts, guaranteed term deposits, and investment funds (which are similar to mutual funds).
4. There are 3 ways to access the savings in your policy.
- You can make a partial withdrawal of the savings.
- You can take a loan from the policy - You can borrow some of your own money in the form of a loan and you will be charged interest until the loan is repaid. I always find this strange, that you need to borrow and pay interest on your own money. It’s like having a savings account at the bank that you need to make a withdrawal from. Only to have the bank tell you that you can’t have your own money. You can only borrow it and you will be charged interest on it until you pay it back.
- You can cancel your policy - When you cancel your policy, you should receive the cash value of the policy less any fees charged by the insurance company.
Since the savings grows tax free in the insurance policy, you may have to pay taxes when you take money out.
5. Taking money out of your policy may reduce the death benefit.
The death benefit is the amount of money owed to the beneficiary of your life insurance policy when you pass away. Universal life insurance policies vary on this point. You would need to read your policy or ask your insurance company or agent to be sure.
6. The investment savings may be lost when you pass away.
This is also something to discuss with your agent or insurance company. With whole life insurance, the savings is almost always kept by the insurance company when you pass away. But with Universal life insurance, you often have an option to have both the life insurance and the savings paid out. Be sure to discuss this with the insurance company. You want to be sure that the savings aren’t lost when you pass away.
7. If you can’t pay your premiums, the insurance company will use the money from the savings to keep the insurance policy in effect.
This will keep going until all of the savings are used up or until you start paying your premiums again. If the savings are used up, your policy will usually be cancelled.
8. Your insurance premium goes to three different things.
Universal life policies usually break down how much each portion is costing you. So if you’re paying $100 a month for your policy, that $100 is paying for three things.
- The mortality charge – this is how much it costs you just for the life insurance. So if you have a policy with coverage for $100,000 (ignoring any savings in the policy), this is what the mortality charge is paying for.
- Fees and administration – for managing and maintaining the policy and investments.
- Investments - this is the savings (cash value) portion that I was talking about earlier.
9. Universal Life Insurance usually has higher fees and administration costs than term life insurance.
Insurance companies and agents make good money from selling universal life insurance and this money comes from the fees you pay. One thing that’s nice about universal life insurance compared to whole life insurance is that the fees and administration costs are disclosed to you so you can see exactly how much it’s costing you.
10. Pay attention to how the mortality charge is set up.
This is usually done in one of two ways.
- Level cost of insurance (LOI) – this means that the mortality charge never changes. If the mortality charge was $30 a month when you were 30 years old, it will still be $30 a month when you’re 65 years old if you still have the same insurance policy.
- Yearly renewable term (YRT) – this means that the mortality charge will be adjusted annually. As you grow older, your chances of passing away usually increase, so the mortality charge goes up as your chances of passing away increase. What this means is that when you are young, you will be charged very little for a mortality charge, but as you age, that cost will increase over time. This has pros and cons.
Pros – when you’re younger and the mortality charge is smaller, more of your premium will be going into investments and you can take advantage of time to grow your money.
Cons – as you grow older, the mortality charge could potentially become more than your total premium. If this happens, the insurance company will start taking money from your savings to make up the difference. For example – Say you pay $100 a month for your policy. When you’re 30 years old, the mortality charge might only cost $30 per month. That means that $70 a month is going into the investments and paying for fees. But by the time you’re 65, the mortality charge might be $125 a month. If you still only pay $100 a month for the policy, it means that the insurance company is taking $25 a month (plus some extra for fees) out of your savings.
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