What is Universal Life Insurance

The development of the Universal Life (UL) plan added more scope to life insurance. Whole Life plans operated with cash values that significantly lagged behind the accumulated premiums. The Universal Life plan is unique in that it embodies an interest-bearing accumulated fund. This ensures that the cash value would exceed the accumulated premiums in a few years.

It is certainly a decisive advantage that makes life insurance less of an expense. However, there is a certain degree of scepticism about the value of combining insurance and savings. A few advisors believe it would be better to take term insurance and invest the difference. Advocates of cash value insurance plan point to the benefit of forced savings. Some things are only effective in specific contexts and situations. The Universal Life plan is not an exception.

Insurance agents sometimes tell clients that after a few years the Universal Life plan pays for itself. The idea of the plan paying for itself is based on the interest from the accumulated fund being used to cover the premium. It is certainly a novel way to advertise the plan. By no means can this approach be said to be fraudulent. It can actually work. The issue arises when two benefits of the plan are highlighted simultaneously. A representative should not state that the plan would both pay for itself and provide cash on demand. This would be the equivalent of having your proverbial cake and eating it too.

One insurance agent stated that he told his clients that after 12 years, they can withdraw the maximum amount from the accumulated fund and invest it in a fixed deposit. The interest from the fixed deposit would then cover the premium for life. The problem with that is that the interest rate on a fixed deposit the agent referred to was lower by two percent, compared to the declared interest on the UL plan.

If a client left the fund on the savings portfolio of the UL plan, it would have been able to generate the premium without intervention. The assumption here is that the person is not likely to have the fund liquidated for any reason. In order to for the plan to pay for itself after a few years it must not be liquidated. This would not necessarily fall into the category of unethical advice. To frame this as an added benefit of the plan would be intellectual dishonesty. Once the plan operates on a level-premium basis, the premium would be more affordable in the future anyway.

What is dangerous about the notion of the plan paying for itself is that it is used to spend more than they need to on a cash value plan. If someone needs one million dollars worth of coverage, the self-serving advisor would place all of this on a cash-value plan. Some life insurance needs have a greater time span than others. A mortgage balance, for example, could account for a significant portion of life of life insurance needs. This could be covered by term insurance. If a client has children and wants future education expenses to be included in life insurance needs. That could be covered by term life insurance as well. One should not buy into the sharp tricks by sales representatives trying to inflate their commissions.

Establishing the extent of life insurance needs is only the first part of sound financial advice. Typically, the next step should be to analyse the needs so that you use the appropriate combination of life insurance plans. The Universal life plan can work for you only if it suits your goals and needs. Only permanent or long-term needs should be covered on cash value plans instead of term insurance. Anything else would cause you to spend more on life insurance than you need to. Life insurance is a beneficial product when used properly, as is the Universal Life insurance plan when applied contextually.