Universal Life Insurance Isn’t the Investment You Think it Is. Here’s What to Do Instead

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If you have dependents, life insurance should be part of your overall financial plan. It provides financial support to your family if you pass away and gives you peace of mind that your loved ones will be cared for.

But what about when you’re still alive? Universal life insurance is often sold as a combination of life insurance and an investment product. Similar to whole life insurance, universal life insurance lasts for your entire life (as long as you pay your premiums) and provides a standard death benefit coverage as well as a cash value that grows over time. 

While it may sound tempting to have a life insurance policy you can tap into for cash while you’re still alive, it comes at a hefty cost — universal life insurance is much more expensive than term life insurance, which provides the same death benefit minus the savings vehicle. Here’s why experts say universal life insurance is rarely worth it, and what they recommend instead. 

What Is Universal Life Insurance?

Universal life insurance is a type of permanent life insurance policy that combines a death benefit with a savings vehicle. With this type of policy, you’re guaranteed coverage for your entire life as long as you pay your monthly premiums. 

“You pay a premium each month, and it builds up a cash value that you can borrow from or withdraw later,” says Leslie Tayne, an attorney and the founder of Tayne Law Group, a debt relief firm in New York. Compared to whole life insurance, universal life insurance offers greater flexibility since it offers adjustable premiums and an adjustable death benefit. However, experts typically recommend term life insurance over both universal and whole life insurance.  

In general, experts warn against treating life insurance as an investment. “Life insurance is not meant to be an investment vehicle for the living,” says Jeremy Schneider, founder of Personal Finance Club. “The concept of insurance is to protect yourself financially if an unlikely but expensive bad thing happens — or in this case, protecting your loved ones who depend on your income in the case of your death.”

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, 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. 

Pro Tip

Before applying for universal life insurance, consider whether your financial goals might be better served by a term life insurance policy or non-insurance investments like stocks or real estate.

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. 

Universal vs. Whole Life Insurance

Whole life insurance is a type of permanent life insurance policy that covers you for your entire life. Like universal life insurance, this type of policy combines the death benefit associated with term life policies with an additional savings component.

Unlike universal life insurance, whole life policies have fixed monthly premiums, with a certain portion going toward your death benefit and the rest going toward your accumulated cash value. Whole life insurance policies often have more expensive premiums than universal life, although both are significantly more expensive than term life insurance. 

“A universal life plan has an adjustable cash value, and the premium can be adjustable,” says David Lewis, a certified financial planner and president of Montlake Capital Management in Texas. This means that if you lose some income in any given month, you have the option of making only your minimum payments and not the full amount. On the other hand, if you have some extra cash, you can put it towards your insurance premiums. Compared to whole life insurance, this feature of universal life insurance offers greater flexibility.

Universal Life InsuranceWhole Life Insurance
Permanent policyPermanent policy
Flexible monthly premiumFixed annual premium
Variable cash value returnsGuaranteed cash value returns
Ability to withdraw or borrow against cash valueAbility to withdraw or borrow against cash value
Adjustable death benefitFixed death benefit

Who Qualifies for Universal Life Insurance

In general, you’re likely to qualify for universal life coverage unless extenuating circumstances cause your application to be denied. 

Factors that could cause you to be denied include:

  • Poor physical health: Insurance companies may decline to provide coverage for individuals with serious health conditions.
  • Age: Most insurance companies will only provide life insurance coverage for individuals under a certain age.
  • Lifestyle: Insurance companies may be more likely to deny coverage to individuals with high-risk hobbies, a high-risk job, or unhealthy habits.
  • Credit: Insurance companies often run credit checks before underwriting insurance policies. If you have poor credit or a poor financial history, you may struggle to qualify for a policy.
  • Criminal record: You may be denied life insurance coverage if you have a criminal record, especially if you have felonies on your record.

As with any life insurance, even if you qualify for coverage, factors like your health, age, and lifestyle may affect the price of your premiums. 

How Much Does Universal Life Insurance Cost?

The cost of a universal life insurance policy depends largely on individual factors like:

  • Your age
  • Your health 
  • Your lifestyle and the risks it presents
  • Your coverage amount

Because universal life insurance includes a cash value component, these policies have significantly higher premiums than standard term policies. According to Lewis, the cost of a universal life policy will be many times the cost of a term policy.

Because of this, most experts don’t recommend universal life insurance. Instead of buying universal life insurance, you’ll be better off buying term life insurance for the period that you need it, and then invest the money you save on premiums into mutual funds, index funds, or ETFs, says Schneider. That way, your beneficiaries will still get a death benefit if you die, but while you’re living, your money will grow much more quickly than the money market rates offered by a universal life insurance policy.

How to Apply for Universal Life Insurance

The process of signing up for universal life insurance — or any type of life insurance, for that matter — is different from other insurance policies you may have purchased.

You can’t simply complete the process online from start to finish. You may be able to get a quote online or over the phone in just a few minutes, but the entire process may take several weeks to a month. You usually have to go through an application process that may require a medical exam and an evaluation of your risk factors. 

Here’s a step-by-step guide to applying for universal life insurance:

 1. Determine whether universal life insurance is right for you

Before applying for universal life insurance, decide whether it’s really right for you. If you’re looking to provide your loved ones with a safety net in the event of your death, you may be better served by a term life insurance policy lasting for only the length of time you need it for. If you want to grow your wealth, investing in the stock market or real estate is likely a better option. 

Talking to a CFP or another financial professional can help you determine if universal life insurance is the best fit for you. Just be aware that some financial professionals receive commissions from selling insurance products to their clients, which might skew their advice. Consider looking for a fee-only planner, since they are fiduciaries who must give financial advice in your best interest. “It’s nice to have a third party that’s interested in you, not interested in selling a policy,” says Lewis.

 2. Shop around for quotes

If you’ve decided that universal life insurance is right for you, you can start shopping around for quotes. Many companies offer online quotes in just a few minutes, while others require you to speak with an agent to get an estimate.

The initial quote you get isn’t a guarantee of your actual premium, but it can give you an idea of which carrier is most affordable. You’ll still have to go through the application process and, in many cases, a medical exam to determine your actual costs.

 3. Complete your application

To qualify for a universal life insurance policy, you’ll first have to complete an application. On the application, you’ll have to answer questions about your lifestyle and medical history. Questions that you’ll likely have to answer include your:

  • Name
  • Address
  • Employer
  • Annual income
  • Age 
  • Height
  • Weight
  • Medical conditions
  • Lifestyle habits and hobbies

“They’ll want to understand your lifestyle,” Lewis said. “Are you a smoker? Are you a pilot? Those things make a difference on your premium.”

It’s critical that you don’t lie on your application. An insurance policy is a contract, and by providing false information, you run the risk of voiding the contract or your insurer either canceling your policy, or worse, refusing to provide a death benefit to your beneficiaries.

 4. Complete a medical exam

Many life insurance policies require a medical exam to determine whether you’re eligible for a policy and determine your premium. During the medical exam, you’ll answer questions about your medical history and your family’s medical history. You’ll also get a thorough physical that includes the doctor measuring your blood pressure, pulse, height, and weight and collecting a blood and urine sample.

Not all insurance policies require a medical exam, but keep in mind that those that don’t may come with higher premiums.

 5. Finalize your policy

Once the insurer has finished underwriting your policy and you’re approved, you’re all set. You can sign any necessary documents, designate your beneficiary, and pay your first month’s premium.

In some cases, your application may be denied or postponed due to health or lifestyle factors. In this case, you can make lifestyle changes such as quitting smoking, losing weight, or switching to a less high-risk career and then reapply down the road. You could also try applying for a different policy through a different insurer. 

Universal Life Insurance Companies

There are many universal life insurance companies to choose from. While many companies specialize in offering life insurance, some of the most popular insurers of auto and home coverage also offer universal life policies.

Progressive

Progressive offers a variety of life insurance policies to choose from, including universal life insurance. Progressive doesn’t actually underwrite its own life insurance policies. Instead, when you apply, your information is redirected to eFinancial, which provides quotes from Fidelity life and other insurers not affiliated with Progressive.

Life insurance coverage options through Progressive range from $5,000 to $1 million, and you can use an online form to get a quote. But remember, Progressive doesn’t underwrite or service your policy. They simply redirect you to another company.

Nationwide

Nationwide offers several universal life insurance options to help best fit your needs. Policies may include a tax-free death benefit, easy access to your accumulated cash value, and long-term care protection to combine two insurance coverages into one policy. Policies available are:

  • Nationwide Survivorship Index UL
  • Nationwide Indexed Universal Life Accumulator II
  • Nationwide Indexed Universal Life Protector II
  • Nationwide No-Lapse Guarantee UL II

Nationwide offers an online tool to help you decide which life insurance policy is best for your situation. But to get a quote, you’ll have to call to speak with an agent.

Farmers

Farmers offers two universal life insurance policies: Farmers EssentialLife Universal Life and Farmers Index Universal Life. You can purchase coverage for individuals ages 15 days to 80 years, and coverage amounts range from $80,000 to $250,000. You can also add riders for disability, terminal illness, and critical illness.

One of the benefits of Farmers life insurance policies is that many don’t require a medical exam. However, you can’t get an online quote and will have to speak to an agent to sign up.

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