How complex is Universal Life Insurance?
Understanding Universal Life Insurance is no simple feat. Do you have a UL policy and know how it works?
Universal life is the most complex of the life insurance products. A major "complexity" of UL policies that many don't realize is that at some point, there is a diminishing return. Meaning, at a certain time, the cash value that has been accrued over the years will eventually start to diminish until the policy expires.
Sounds counterintuitive, right?? Why would you keep accruing cash value only to be left with zero? What many don't realize is that the UL cost is made up of two components: (1) the premium payment (which may be low, depending on the age of purchase) and (2) the cost of insurance, which accounts for carrier admin fees, brochure printing, overhead expenses... etc. The difference between the premium (let's just say it's $40) and the cost of insurance (let's say it's $20) is set aside as cash value ($20). Over the years, the cash value accrues with interest, but at smaller and smaller increments. While the planned premium stays constant, the cost of insurance increases each year (inflation), closing the margins that create the cash value.
At a certain point, the policyholder plateaus because the cost of insurance will grow from $20, to $22, to $23... eventually hitting $40, the same as your planned premium. Beyond that point, you start losing cash value as the cost of insurance will supersede the planned premium amount. At that point, your policy is either underfunded. Two things can happen.... you can pay the astronomically high cost of insurance to maintain the policy. Or, you can let it expire.
Is Universal Life considered a good long term monetary investment?
Ultimately, the length of UL is based on the economic conditions. The interest rates (including cap and floor) are often determined by an Index, generally tied to the S&P 500. This determines how your cash value accumulation behaves. Funds that are tied to an Index, therefore when in a bear market, interest rates tied to UL may not be substantially impacted as compared to variable investments. The primary function of UL is to provide Life Insurance, therefore it may not provide the upside as other investment vehicles, but it does provide a long term death benefit.
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About Pivotal Life Insurance
Pivotal Life Insurance is a family owned, independent insurance agency that focuses on income protection and family security through Life Insurance products (Term Life, Whole Life, Final Expense), Mortgage Protection, and Annuities. With a range of product offerings, we accommodate the varying needs of our clients through resources provided by the nation’s top-rated carriers. Although we are headquartered in South Florida with a branch in Maryland, we service most of the United States as our agents are licensed throughout the country. Pivotal Life Insurance is one of the fastest-growing agencies and we pride ourselves in putting you, our customers, first.
Insurance Is Pivotal. Cherish what’s important.
For more information or if you’d like to join the Pivotal family, visit www.insuranceispivotal.com or call at 561-412-5500.
