• Home
  • GET THE BOOK
  • Start Here
  • Blog
  • Free Resources
  • Shop TBM
  • Courses

The Budget Mom

Real Women. Real Life. Real Finance

  • Home
  • Products
    • Live Rich Planner
    • Budget By Paycheck
  • Blog
  • FREE RESOURCES
  • COURSES
  • GET THE BOOK
  • Shop TBM

A life you love on a budget you can afford.

Here on TBM®, I provide you with simple, easy-to-follow solutions to help you budget your money, pay off debt, save more, and crush your financial goals. But more than that, I give you the tools to start doing the things that matter most to you, on a budget that actually works!

What Is Universal Life Insurance and Is It a Good Investment?

August 8, 2019
FINANCE 101

Share42
Pin206
Share
Tweet
Email
248 Shares

Deciding on the right insurance is complicated. There are so many different types from term to whole to universal. Taking care of your family is the number one priority, but can insurance also be an excellent way to invest? If you’ve heard that universal life insurance can help you make money, here’s what you need to know!

There are so many choices out there for life insurance, and it’s SO EASY to get sucked into a life insurance policy that isn’t financially smart.

I have talked about term and whole life insurance in the past, but today I wanted to talk about universal life insurance and whether it's a useful tool for investing.

  • How is universal life insurance different than whole or term?
  • How does universal life insurance work?
  • And, is universal life insurance a good investment?

But before we answer these questions, let’s talk about what life insurance IS and is NOT.

What is the Real Purpose of Life Insurance?

None of us wants to dwell on the idea that we might die younger than we should. Unfortunately, the unforeseen happens. And when it does, your life insurance benefit can make all the difference to your family’s future.

From universal to whole to term, there is a life insurance type for whatever you want it to be.

But, in my opinion, life insurance should really only be responsible for three things:

  1. Your burial expenses
  2. Maintaining your family’s standard of living
  3. Achieving financial goals for your family

In other words, the purpose of life insurance is to protect your loved ones financially after you are no longer here. Of course, the need for life insurance will vary with your age and life-stages.

From caskets and services to cemetery plots and headstones, burial costs are not affordable for many families, and yet, they are unavoidable.

Having the right kind and amount of insurance means that your family won’t have to deplete their savings – or worse, however – go into thousands of dollars of debt for the cost of your funeral expenses.

And burial expenses are only the beginning. Your loss not only leaves your family with emotional hardship but with a financial one as well. Whether you are a co-contributor, primary financial provider, or primary care provider, your loss will significantly impact your family‘s finances. Life insurance ensures the trauma of losing you will not be compounded by the loss of their home or standard of living.

Finally, life insurance can also be that “nest egg” to provide for your children’s education, pay off the mortgage, or other financial goals you had hoped to achieve for your loved ones.

Now, that being clear, let’s talk specifically about universal life insurance.

  • Read: Is Renters Insurance Worth It?

How is Universal Life Insurance Different?

Like whole life, universal insurance provides a lifetime death benefit coverage as long as you continue paying the premium. This means the full amount of your policy is payable to your beneficiaries upon your death, even if you live to 104. HOWEVER, there is a big catch here that has to do with the maturity date.

Term life is short-term insurance – usually 1- to 30 years – that provides a death benefit during the time in your life when your family needs it most.

What makes universal life unique is the built-in savings account that is part of your policy. Because of this investment feature, this type of insurance is also known as “cash value” or “adjustable” life insurance. A universal life policy accumulates cash value, earning interest at the current market rate.

In a universal life policy, you can have a flexible premium. You may choose the option of contributing extra to the savings portion of your policy each time you pay your premium (a “premium” is simply the amount of money you pay to keep your insurance policy activated.)

As the cash value of your policy increases, the savings portion can be used as:

  • Premium payments
  • Loan collateral
  • Surrender value, if you terminate the policy.

This, of course, depends on how much you contribute and how well the investments perform. You will also have the option to withdraw from the savings like you would at a bank.

While this may sound like a great plan on the surface, let’s dig a little deeper so you can understand the downfalls as well.

  • Read: Term vs Whole Life Insurance: Which Is Right for You?

How Does Universal Life Insurance Work?

Universal life gives you the option of dividing your payment into both insurance premiums and savings. The insurance company determines your minimum payment amount. It is based on the cost of your policy, the amount of your death benefit, and the administrative fees.

Once the premium cost is met, you have the option to pay more than this amount, which will go into the savings account. This is your “cash value.” The cash value will grow according to the annual interest rate set by the insurance company. There is also a maximum payment amount, which is determined by the IRS.

Premium Payments from Savings

Many people who choose universal life contribute the maximum allowed amount to build as much savings as possible. The common goal is to one day use the cash value to pay the insurance premiums.

However, if the cash value of the savings portion runs out, you may end up burdened in retirement with the increased cost of your premiums and with no surrender value left to the policy. Worse yet, when the balance goes to zero, your policy may lapse without your knowledge.

It is important to note that, while whole life has a fixed premium, universal life does not. It can continue to increase throughout the lifetime of the policy.

Using the Cash Value as Loan Collateral

The savings in your policy can be used as collateral if you choose to borrow money from the insurance company against the accumulated cash value without tax implications.

Be aware that you are not borrowing against the amount of insurance, but only against the cash value you have contributed. That savings portion is the maximum amount you will be allowed to borrow, and the insurer will set the interest rate.

Surrender Value of Universal Life Insurance

If you decide you want to surrender your insurance policy – meaning you no longer wish to make premium payments and your beneficiaries will no longer receive the death benefit – your insurer will return the cash value of the policy back to you.

So, with all these options, can this type of cash value life insurance be a good investment?

  • Read: 6 Financial Planning Tips for Single Parents

Is Universal Life Insurance a Smart Financial Investment?

The bottom line is: no. Unless, of course, you’re an insurance company.

If you are investing in universal life, you are paying a high premium for a lengthy period of time, possibly two to five times longer than you would with term life. Your premiums will increase substantially as you age. This means you could end up paying way more out of pocket than your death benefit is worth.

And don’t forget the attached fees. There are fees for the policy itself. There are also administrative fees and commissions. The reality of this is, even if you contribute the maximum, it will take you more than three years to start building any cash value.

The Big Secrets about Universal Life Insurance

Most people assume whole life and universal life policies are good as long as you live. But this definitely isn’t the case in many circumstances. Most of these policies have a “maturity date.” Simply put, the policy can end, and you could receive nothing from it, especially if you have reinvested all the cash value to pay the premiums.

“Universal life insurance policies have a maturity date which occurs when you turn a certain age (often between 85 to 121). When a policy reaches its maturity date, you generally receive a payment and coverage ends.”  –ValuePenguin

Also, what happens to this cash value if you borrow it or, worse yet, if you pass away?

Well, if you withdraw any of the cash amount from the savings portion, that same amount will be deducted from your death benefit!

Worse yet, if you die, the cash value in your policy goes back to the insurance company. That’s right. Your family gets the death benefit from the insurance, but the company receives the amount you invested into savings.

  • Read: 30+ Ways to Help You Save More Money

What’s the Best Insurance Investment?

The best insurance investment is not to “invest” in insurance.

If you remember that the purpose of insurance is to replace your financial contribution to your family in the event of your death, it’s essential to have what your family will need to carry on, but insurance is not a financially savvy way for you to make money.

The smartest option is to buy term life insurance. You will pay a much lower premium than you would with whole or universal. Then take the money you saved on premiums and invest it in an IRA or mutual funds that are not connected to insurance. You will earn a much higher rate without the attached fees.

If you do this, by the time your term insurance policy matures, you will no longer need insurance. You should have enough in your investments to be “self-insured.” You and your family will benefit – not the insurance company.

  • Get a quote from Bestow for term life insurance
Share42
Pin206
Share
Tweet
Email
248 Shares

Filed Under: Tagged With: FAMILY, INSURANCE, LIFE INSURANCE

Previous article:
« Money Saving Tips for Back-to-School
Next article:
July 2019 Budget Monthly Meal Plan »

Comments

  1. Dustin Vargas says

    August 11, 2019 at 3:23 pm

    As an insurance agent all 4 life policy types have their place. Guaranteed 4% on a UL as a conservative part of a portfolio that grows outside of the mistakes made on Wall St and real estate still has value. Whole life is outstanding for limited pay options or fixed payments for life. Term is cheap BUT you NEED a company with lifetime convertibility or you risk not having life insurance at all! All in all it’s a good review but I think your research wasn’t complete on the beneficial side, maybe because those circumstances do not apply to you … though they could to your readers?? Something to consider moving forward. Thank you for at least having the conversation!!

  2. Tai-Isha Jack says

    August 30, 2019 at 8:46 am

    Thanks this is good information. very helpful. I didn’t know this. But I will be discussing it with my husband and making some changes to our policy.

Hello, I'm Kumiko, but everyone just calls me Miko. Welcome to my blog, The Budget Mom. I am an Accredited Financial Counselor® , and mom to a rambunctious boy. Come along with me as I strive to live a life I love on a budget that I can afford. Read more about me.

RECENT YOUTUBE VIDEO

The Budget Mom

The Budget Mom
It’s time for another Real Life Budget. I asked my readers to submit their REAL information. Real spending, real debt, and real savings goals.

I am taking those real-life numbers and showing you how I would organize and budget that information using my Budget By Paycheck® Method.

If you would like to submit your budget information to possibly be picked for a Real Life Budget that we will show on YouTube, please reach out to budgets@thebudgetmom.com.

Diane is a single mom who is a Database Administrator for an IT Department at a local college. She lives in Queens, NY, and eventually wants to move to a lower-cost of living area in the future. 

Diane submitted her information because she is struggling to organize and tackle all of her larger short-term goals.

CHAPTERS:
00:00 Introduction
02:15 Why & Personal Story
04:20 Income 
04:37 Fixed Expenses
05:48 Variable Expenses
06:31 Debt
07:53 Savings Goals
10:18 Budget By Paycheck Method
14:51 My Recommendations

➡️ HOW I TRACK MY SPENDING: https://bit.ly/3aIe89I
➡️ HOW TO USE A BUDGET CALENDAR: https://bit.ly/2IzF2Vj
➡️ FINDING YOUR WHY: https://bit.ly/3aJUryj
➡️ THE BUDGET MOM'S FINANCIAL FREEDOM STEPS: https://bit.ly/3cfJXsp
➡️ HOW TO GET STARTED WITH THE CASH ENVELOPE METHOD: https://bit.ly/2vQJaO5
➡️ HOW TO CREATE A PLAN OF ATTACK TO PAY OFF DEBT: https://bit.ly/2wDETxF

ABOUT ME

Kumiko Love is a single mom who empowers women everywhere to regain control of their financial lives. An Accredited Financial Counselor with over nine years of experience in the finance industry, she founded The Budget Mom, a community of millions of women on a path to financial fulfillment.

She's also the creator of the wildly popular Live Rich Planner® and Budget by Paycheck® Workbook. Love has been featured on Good Morning America, the Today show, CNN, CBS, ABC and in USA Today, US News, World Report, Huffington Post, Money Magazine, Parents Magazine, the Washington Post, and Real Simple. She lives in Spokane Valley, Washington.

YOU CAN FIND ME AT:

📝 WEBSITE: https://www.thebudgetmom.com
📘 FACEBOOK: https://www.facebook.com/thebudgetmom/
📸 INSTAGRAM: https://www.instagram.com/thebudgetmom/
📌 PINTEREST: https://www.pinterest.com/thebudgetmom/

GET STARTED

➡️Start Here: https://www.thebudgetmom.com/start-here/
➡️Courses: https://courses.thebudgetmom.com/
➡️Free Resources: https://bit.ly/2PDmTHz
➡️GET 10% OFF my popular Budget-by-Paycheck Workbook - Coupon Code TBMYOUTUBE https://bit.ly/3FEdZFp

Soundstripe License Code: LBWMAQPEPWYVFKT3
Load More... Subscribe
Free Resource Library

Recent Posts

  • To Pay Off Debt or Not to Pay Off Debt: The Pros and Cons of Using Home Equity
  • The Secret to Personal Finance I Never Learned About in Business School
  • Don’t Overpay for TV and Internet: How to Shop Around for the Best Deals
  • 4 Simple Tricks to Stick to Your Grocery Budget
  • Celebrate Without Breaking the Bank: How to Save for Special Events

Blog Categories

Amazon Associates Disclosure

The Budget Mom, LLC is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to amazon.com.

  • Cart
  • Shop Policies

Start With My Friday Newsletter

Every Friday I send you a short helpful email with my popular Friday freebie. Join my 500k+ subscribers!

About

  • Home
  • ABOUT TBM
  • Contact
  • Start Here

Important

  • DISCLAIMER
  • PRIVACY POLICY
  • Subscribe

Favorites

  • YouTube
  • Blog
  • Live Rich Planner
  • Budget by Paycheck

Start With My Friday Newsletter

Copyright ©2023, The Budget Mom®
This website contains affiliate links, which means that if you click on a product link, I may receive a commission. This website is a participant in the amazon services llc associates program, an affiliate advertising program where I earn advertising fees by linking to amazon.com.
  • How financially fulfilled are you? Take this 2 minute quiz to get your score!
    Click Here to Start