We all want to make sure our family is taken care of if we pass away suddenly. Life insurance is the best way to make sure they are taken care of, but with so many types of policies out there, how do you know which is the right one for you?
I’ve talked about term insurance and whole life insurance in previous blogs, today I want to talk about Universal Life policies which in a way is a combination of both. These were popular in the 1990’s when interest rates were higher than today. Since then there have been some good changes to these policies.
How it works- When you pay your premiums for your Universal Life policy, your money is basically split into two separate piles. A portion of it goes to pay for the life insurance itself. The rest of it goes into a cash pile and builds up over time. As you age you become higher risk so more of your premium is put towards the life insurance pile and less into the cash pile. At some point the amount of your premium being put into the insurance pile will exceed what you pay in premium. This is one of the cons of owning this type of policy and you have to pay attention to your annual statements. When this happens you have 3 choices.
Choice one: Do nothing and keep paying the same amount you have always paid. By doing this you are not able to cover the cost of insurance itself which means the insurance company will pull money from your cash pile to make up for the shortage. This will cause the cash pile to eventually run out of money and could cause the policy to lapse.
Choice two: Increase the premium you send in when it’s due. This will allow you to maintain the cash pile. If you want to make sure the cash pile never goes down, you will need to increase your payment on a regular basis.
Choice three: When you reach this point in your policy you should have a significant amount of cash built up in the policy. I would sit with an advisor and evaluate your insurance needs. By the time reach this point in the policy you are older and may not need as much insurance so you may be able to take the cash and put it into a single premium life policy to pay for your final expenses and pay the premium one time and never have to worry about it again.
Remember how earlier I said there have been some good changes to these policies? Here it is. Now there are Guaranteed No-Lapse Universal Life policies. They work very similar to the traditional policy. You get the advantage of the cash build up, but you have to pay attention to your statements. One thing you don’t have to do is worry about your premiums going up or your policy lapsing. These policies have a guarantee built into them. As long as you are paying your premiums you will not have to worry about the policy lapsing. It is a permanent policy that costs less than whole life and will be there for your family when you need it.
Talk to your insurance professional today to find out what type of policy is best for you.