How Does Universal Life Insurance Work?

Universal life insurance has two components: death benefit coverage and an accumulating cash value. When you pay your monthly premium, it’s split between the two parts of your policy, with a portion going to each. Similar to term life insurance, universal life insurance provides a death benefit to your beneficiaries when you die. Some universal life insurance policies offer a flexible death benefit, meaning your insurer may allow you to increase your death benefit — which will in turn increase your premiums — if you take another medical exam. 

Typically, the death benefit component of life insurance is the most important part, since it gives your loved ones a financial safety net if you die and can no longer provide for them. For this purpose, experts say term life insurance is entirely sufficient.  The additional feature universal life insurance has that term life insurance doesn’t is a cash value that earns interest over time based on the current money market rates. As the cash value increases, you can use it to pay your premiums, borrow against it, or withdraw it altogether. 

However, if you’re looking to grow your money, there are better options available. “When you compare the rate of investment accumulation inside a life insurance policy versus other options available to you out there (e.g. index funds, owning real estate), it is very slow,” says Shang Saavedra, creator of Save My Cents. In addition, she says, there’s very little transparency in how your money is growing, since there’s not a lot that insurance companies are required to publish about their policies. In contrast, publicly traded companies in the stock market are required to publish their financial reports annually and are subject to public scrutiny. 

Post a Comment