The Pros and Cons of Universal Life Insurance

By Lorne Marr, LSM Insurance

Special to the Financial Independence Hub

Universal Life Insurance gives you flexible, cost-effective coverage that lasts a lifetime. It can be personalized to suit your changing needs and has a combined tax-advantage investment component that you can manage according to your risk tolerance and financial goals. Universal Life Insurance was invented by the recently deceased George R. Dinney in 1962. He explains the concept in his authorship of “Life Insurance as a Game.”

Universal Life Insurance allows you to adjust your premium payments (reasonable limits apply) as your needs or situation change. It is the ideal choice for people interested in flexible coverage. Unlike term insurance, which covers for a set number of years, universal coverage protects your family for life, as long as you keep up with the premium payments.

The policy has an investment component that gives you the opportunity to grow your wealth, so you have the option of using your life insurance while you are still alive. This means you can fund financial goals or leave more to your beneficiaries.

All the premium payments you make go into a policy fund. This fund pays for the cost of your coverage plus investments. The balance remaining after coverage costs are invested on a tax-advantaged basis. There are a variety of investment options for you to choose from, based on your risk tolerance and financial objectives.

How much your investment will grow depends on the performance of your investments and the amount of your premiums. The money in the investment portion of your account is yours. You can use it to make premium payments or a source of savings. You can use it as collateral for a loan, withdraw it outright or just let it grow for financial security for your loved ones. Don’t forget that borrowing or withdrawing funds from your policy reduces its cash value.

Pros of Universal Life Insurance

Universal Life Insurance provides many benefits, such as:

  • Lifetime protection.
  • Flexible premium – you can increase or decrease your premiums depending on your budget.
  • Premium Holidays – you can use any cash value within the policy to take a premium holiday if you are short of funds, out of work etc.
  • You can get plans with a Level cost of insurance – so you are locking in at a set rate.
  • You can accumulate tax sheltered savings – although the the amount of tax sheltered room decreased after Jan 1, 2017.

John A White of Financial Guideposts tweets, “What would happen to your loved ones if you were gone? Make financial preparations today.”

“Universal Life Insurance gathers cash value that may be used to help pay for the cost of insurance, riders and other policy expenses,” tweets Quality Quote of Innovative Advisor Services.

Cons of Universal Life Insurance

But, as with all things, there is always a downside, such as:

  • Higher initial premium than Term Insurance
  • The policies themselves can be very confusing even for certain brokers.  So if you are investigating a Universal Life policy make sure you are working with a broker who understands how the policies work.
  • Higher Management Expense Ratios (MERs) on many of the investment options within these policies.
  • Plan with Yearly Renewable Term cost of Insurance option can become unaffordable in the later police years.
  • Many plans have high surrender penalties in the first 7 to 10 years.

“Cost of ‘universal life’ insurance stings,” tweets Robert Powell, Editor, Retirement Weekly; Columnist, MarketWatch, Wall Street Journal, TheStreet & USA TODAY.

“Premiums could rise. Although they are designed to remain steady, if the measuring index performs consistently below the anticipated rate, premiums may increase in future years,” says Jordan Niefeld, CPA, CFP of Raymond James & Associates.

Universal Life Insurance Sales Increase

A Universal Insurance policy can be very complicated. There are so many options and variables that the average person prefers a straight-forward term policy – or so is the common belief as to why sales for a Universal policy have declined.

This has recently changed. After several lean years, sales have bounced back. Research conducted by LIMRA and posted in The Insurance and Investment Journal revealed a growth in sales of 14% in premiums. That number increases to 20% when you include sums deposited by policy holders into the accumulation funds. Premium sales for Term insurance rose 7%.

In terms of number of policies sold, Universal life insurance dominated the second quarter of 2015. That’s 9% more than the first quarter of 2014. The sale of Whole Life policies rose 4% during this time and Term policy sales increased 6%.

When comparing the first half of 2015 with the first half of 2014, sales of Universal Life insurance policies outdid Whole Life sales with a 10% versus 9% growth rate. When excess premiums are included, the growth rate is calculated at 16%. Term Insurance premium sales during this time stayed the same at 3%.

According to LIMRA, the number of Universal life policies sold in the first quarter of 2015 grew by 7% compared to the same period the year before. Whole life sales dropped 1% and Term policy sales edged up 2% from 2014 to 2015.

Lorne Marr was born in Toronto, Ontario. He started in the life insurance industry in 1993, with Metropolitan Life after completing his MBA and is the Founder of LSM Insurance. He has appeared in numerous media outlets, including the Toronto Star, The Globe and Mail, The National Post, The Toronto Sun, Investment Executive and MoneySense Magazine. This article first appeared on the LSM Insurance website on February 16th and is published on the Hub with permission.

One thought on “The Pros and Cons of Universal Life Insurance

  1. I believe the more than 4% combined costs of insurance fees and investment fund MER I am paying is a significant drag on realistic returns on the investment portion of the policy. I have to wonder if this does not make a Term policy and a separate investment strategy a far more realistic option, especially in the era of TFSAs, ETFs, “Robo Advisors” and low MERs.

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