Whole Life (Universal) for Parents Explained
Universal life insurance is a variation of whole life insurance. It’s is a newer form of insurance designed to offer a savings option, like whole life insurance, while being more flexible with its payment structure.
Like whole life, universal life insurance involves the insurance company using a portion of your premiums to invest in bonds, mortgages, and money markets. Many people like universal life insurance because it includes a guaranteed minimum interest rate - around 4% - that ensures a minimum return on your money.
If the insurance company does well with those investments you'll enjoy a higher interest rate and greater returns, if they don't do well you'll receive less, though never less than the guaranteed minimum.
Universal life insurance also allows you to choose one of two ways for your beneficiaries to receive money should you die:
- Option A - this option pays the death benefit from the insurance policy's cash value. The best part about this option is that if enough money to pay the death benefit and other fees accumulates in you tax-deferred savings portion of the policy, eventually you may no longer need to make payments on the policy at all. This also depends, however, on the success of the investments made by your insurance agency.
- Option B - this option pays the amount stated in the life insurance policy plus any cash value you may have accumulated over the years. This option offers a death benefit that grows every year, and can provide your beneficiaries with a lot of financial support. The drawback to option B is that as you get older your premiums will increase because the same amount of death benefit costs more as the insured person grows older.
So is universal life insurance for you? That depends on your age and the ages of your children.
Since universal life includes both life insurance and an investment vehicle, it makes sense that only those people who will need life insurance into their 70s should purchase it.
This means that if you're an older parent with younger children, universal life insurance might be a good bet.
A universal life insurance policy should also be kept in force for at least 15 years in order to get any return on the policy. So if you're looking for something less expensive or short term, this plan might not be for you.
On the other hand universal life insurance policies also offer more flexible payment options. This is useful for families who might not always be able to pay the same amount every year.
Just remember that if you pay too little for too long your policy will lapse, leaving you without insurance protection policy.