When You Should Buy Universal Life Insurance?
So, if you are thinking about purchasing Universal Life Insurance, let me give you some details of what you should know before purchasing this product. Universal Life came on strong in the markets in the mid nineties, when interest rates were at very high levels. It was marketed as an alternative to Whole Life Insurance which was going through a big scandal at the time called, the vanishing premium.
Essentially whole life policies that were projected to be paid up after a certain number of years, were grossly missing the mark. People found themselves having to pay many years beyond the illustrations that were presented to them, some years before.
Why is Universal Life Insurance A Good Option?
The beauty of Universal Life is that rather than depending on the insurance company for a return which is set behind closed doors, the power now shifts to the insured who can self manage his insurance and select how and where his premiums are invested.
Essentially Universal life Insurance is a self-directed plan much in the same way you manage your investment portfolio. You make all the decisions as to how much you want to invest beyond the required minimum premium. It is completely flexible; you can choose to invest in fixed income with guarantees or a wide array of mutual funds.
The choice is yours. If you manage it properly, you can borrow or leverage, or simply remove the excess cash over time and apply the proceeds towards other investments which makes the borrowing costs tax deductible.
Let’s talk about the ways to set up a Universal Life plan. You can select a guaranteed cost of insurance, known as level cost, or you can choose to purchase a variable cost of insurance known as YRT, or yearly renewable cost.
Many insurance brokers are frightened of recommending YRT cost of insurance as the future premiums will increase exponentially when you are older and you could lose your life insurance at life expectancy when you need it the most.
The premise behind it is that a well managed investment within the YRT Universal Life plan will offset the rising costs of the premium in future years. Sometimes this works out and sometimes it does not. The key is effectively and actively managing the plan.
The question is if YRT is more susceptible to risk and could lapse versus a level cost of insurance, why bother? The answer is simple. YRT cost of insurance is substantially less expensive than level cost and in corporate insurance, the amount of tax-free benefit payable to the estate through the capital dividend account is often greater, leaving much more tax-free money to your heirs.
Unlike level cost Universal Life which forces you to select a premium to age 100, how many of us actually live to 100? YRT Universal Life allows you to select the numbers of years you wish to be covered therefore reducing the cost of insurance.
Ultimately the choice is yours as to which way to go, but do not rule out the YRT cost of insurance. It could prove to be the better choice in the long run.
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For more information, please do not hesitate to contact me.