Like whole life insurance, universal life coverage offers a standard death benefit as well as a savings component. The savings portion of the policy is invested by the insurer and produces an annual rate of return for the policyholder. Unlike whole life, however, universal life policyholders can modify their premiums, benefits, and savings component as needed. Additionally, universal life coverage allows the insured to use the interest from the policys investments to pay premiums. But is universal life insurance a wise investment for everyone? Read on to find out.
While most investment advisors do not recommend relying solely on a life insurance policy for estate planning purposes, universal life can work well as one of many tools to diversify your portfolio. Universal life insurance can work well for two types of investors: amateurs and the risk-averse. Those who know little about investing can still reap the rewards of a universal life insurance policy, as the insurer will invest their policys savings for them. Additionally, universal life offers a relatively safe investment opportunity for the risk-averse. Although the interest rates that universal life policies earn can vary significantly, the fluctuations are nowhere near what an investor would experience in the stock market directly.
On the other hand, universal life insurance is not without risks. If you plan on using universal life as an estate planning tool, it has enough flexibility to change as your life does, but the policys performance will always depend on the markets performance. In other words, the amount of cash value your policy accrues will depend directly on how well the insurers investments do in the market. In many cases, insurers guarantee a certain minimum rate of return, but it is not uncommon for the rate to vary considerably.
Whether you use universal life primarily as an investment or for life insurance protection, you will be able to modify three areas of your policy: the premiums, the death benefit, and the savings component. For investment purposes, you want to maximize the policys cash value, which means devoting as much money as possible to the savings element of the policy. This means higher premiums in the short term, but your rates will likely go down over time as you can eventually begin paying them from the cash value derived from the policy investments. If you plan to use universal life insurance as an investment too, remember that paying only the minimum premiums is not usually sufficient to accumulate any significant cash value.