Having a family or loved ones that depend on you can put you in a unique position. Every step-in planning takes into consideration the impact it will have on those around you. Nothing will have greater impact than an untimely passing with unprepared finances that leave your loved ones struggling paycheck to paycheck.
With that, comes the need for life insurance, which financially protects your loved ones. While this doesn’t benefit you in the immediate future, you can rest easy knowing your family will be taken care of if the unexpected happens.
That being said, it can be intimidating and stressful deciding the appropriate life insurance to select.
While there are several choices when it comes to types of life insurance, this article will cover three different types of universal life insurance that protect your family’s finances.
Each has their own nuances and with that brings a potential of added benefits to you. We should note that universal life policies are not the best choice for life insurance for seniors over 80, but they can be very appealing for younger age groups.
A universal life insurance policy, also referred to as adjustable life insurance comes with a flexible premium, flexible death benefit, and has a cash value associated with it. Funds that are paid in excess of the require premium payment are deposited into various accounts that have the potential to appreciate. Interest and other gains are added to the account while losses in some accounts could depreciate past your initial investment. While these are generalities, let us dive into guaranteed universal life insurance to begin.
Guaranteed Universal Life Insurance
First on our list our list is guaranteed universal life insurance, which in some instances is referred to as no-lapse insurance. This type of life insurance is a combination life insurance that acts like a term life insurance as well as a permanent life insurance. One of the benefits you will note quickly is with this life insurance product, you can obtain life insurance for essentially any age. If you selected strictly term life insurance, you may find it difficult to obtain past your 80th birthday.
What you’ll also notice with a guaranteed universal life insurance policy is that there is little to no cash involved with this product. The agenda with this life insurance policy is that it will cover many of your expenses upon passing and not much else. While this may be a vanilla option, it certainly will protect your family and loved ones financially.
Other benefits include the funds being used for estate taxes and other final payments associated with life insurance payouts. Also, with there not being the added cash portion to the policy, it allows the policy to be more customizable, typically for a decreased premium.
Drawbacks to the policy can be the limited cash aspect, which means your beneficiaries will only inherit the death benefit and not the cash value. Lastly, it will require monthly payments in order to maintain the terms of your insurance policy.
Indexed Universal Life Insurance
Next on our list of universal life insurance policies is the indexed universal life insurance policy. This type of life insurance product allows the purchaser or insured individual to utilize cash portions for investing into indices such as the Nasdaq or S&P 500. While this type of policy may not be the most standard or stable, it is not the riskiest and can offer an added benefit to your retirement.
To gain a better understanding, let us explain how the product works. As with any insurance policy, you pay a monthly premium and indexed universal life is no different. However, when you make a payment, a portion of that is put into the cash value of your life insurance policy. From there, it’ll begin earning returns based upon the market and continue to grow throughout the life of the policy.
Earnings are typically formulated through calculating interest earned on that particular position. For example, if your index rose 5%, your cash balance will be increase 5%, and this may occur on a monthly basis. The benefit to this is your balance is not invested in stocks directly and can be viewed as a slightly safer investment.
While this may seem like an attractive policy it certainly isn’t for everyone. One of the drawbacks to consider is if the market doesn’t perform well then, your cash balance may not see an increase due to value appreciation. Also, it may be more expensive if you have a smaller sized policy.
Offering you the potential of return is wonderful and while you have a certain payout to accompany your cash balance, ensure this fit with your financial plan and you’re not spending too much for the policy.
Variable Universal Life Insurance
Last, but certainly not least on our list is the variable universal life insurance product. This product not only gives you the policy holder a fixed life insurance policy, but I all give you the ability to save and invest a cash portion within the policy.
Unlike the indexed universal life policy where if the market goes down you simply earn nothing, your investments in the variable universal life insurance product can potentially lose value if the market where to contract. This is where the policy gets its name and while it may seem like an attractive way to kill two birds with one stone, it can be risky depending on your retirement plan.
Some of the benefits to this policy include the idea that your cash balance will increase and appreciate to the point of a sizable inheritance for your loved ones. Lastly, your earnings on the cash balance is growing tax deferred, which can be an added benefit to your overall retirement picture.
With the benefits do come some drawbacks, and the first is the potential for negative return on your cash balance. You will need to make the cash portion of your policy whole through large premium payments. While this may never impact your policy, it can certainly be a risk some may not be able to swing. Also, having a cash balance that is below a certain level could cause your policy to expire if not corrected in a timely manner. Lastly, a drawback could be the cash portion of the policy becomes too expensive, detracting from the effectiveness of the policy in the first place.
While this policy may be the riskiest it can certainly offer you the most return if the market works in your favor. This may not be for everyone, but the potential is there to greatly increase the value of your variable universal life insurance policy.
There are many other policies out there and certainly one that will fit your needs. The three policies described in this article are a small sample, but a wide variety within the universal life insurance space.
By starting with universal life insurance, you are able to obtain a policy for nearly any age. This takes the guesswork of you outliving your policy and gives you the peace of mind that your family will be taken care of.
Moving on to the indexed universal life policy, this will afford you the option to gain from market appreciation, but only if the market works in your favor, otherwise it is a glorified savings account.
Lastly is the variable universal life, which can be a powerful tool in your financial plan but does have the most risk associated with it. It’s important to take the time to find the right policy that fits with your budget and financial goals for the age at which you are buying your policy. These policies can often be tweaked so ensure you ask questions before signing up. Life insurance is critical to ensure your loved ones are taken care of for years to come.