When Universal Life Might Pay Off
In an article from the Toronto Star, I saw the first arguments in favour of Universal life that made some sense to me. Basically, universal life benefits the wealthy more than any other segment of the population, despite how it is sold. So, while this discussion won't apply to most of us, it is something to keep in mind if you are trying to figure out what kind of life insurance to buy, and aren't already convinced that Term insurance is your best bet.
Universal life insurance is not the same as Whole Life or Permanent Life insurance. However, like these other products, there is a savings component; Term Life insurance has no savings and is pure insurance.
The trick with universal life is that part of your monthly payment is paying for your insurance, and part of your payment is going into a tax-sheltered environment to earn interest. You read that right: tax sheltered. For the wealthy, if you are looking for a place to put your money that will allow you to earn tax free, this could be a reasonable choice. The tax sheltered savings are controlled by you: you make the choices on how the money is invested, not the insurance company. Prefer something safe? Go with fixed income investments. Prefer a bit more risk? You can choose from a variety of mutual funds.
When you die, this policy will pay out not just the death benefit but also your tax-sheltered savings. This can really help in cases where the family is anticipating large estate taxes. This is perhaps the best reason to have some income and insurance in this form; you can accrue part of your estate in a tax-sheltered environment that will also pay out without tax to family members. A tax-free chunk of money can really help with the sting of inheritance taxes.
The biggest problems with universal life policies are high premiums for the insurance component and often high management fees on the mutual funds held inside the policy. Another caveat can be the cost of changing your mind if you decide this policy is not for you: companies may hit you with a "surrender charge" that takes a big bite out of any savings that you have accrued, especially if you want to get out before you've paid at least 10 years of premium.
Personally, unless you really need a tax shelter, I'd still prefer term insurance. You can get term policies that actually cap your premiums from the time you buy until age 100, which can be a very good deal as you get older. You can also get renewable term insurance that will hold premiums at a particular level for 10 to 20 years, and then they adjust. With an annual renewable term insurance, your rates will go up every year to a specified age, often either 85 or 100. The best bet according to some financial analysts is to get term to 100 or level rates. You'll know how much you are going to pay, and in most cases your income will be increasing while those premiums stay locked in. It can cost you more up-front, but save you a lot in the future.
Monique L. Attinger