Universal life insurance can be a good investment under certain circumstances. For most people universal or whole life insurance is simply not a good investment. There are some exceptions to this rule which we will look into below.
Universal Life Advantages
A universal life insurance policy is a permanent life policy with a savings or cash value feature. The cash value feature allows the policy holder to use the insurance policy like a savings or investment account. He or she can purchase investments through it, take money out and even borrow money against it.
This arrangement has two advantages: it is a tax-deferred retirement plan under the Internal Revenue Code and it allows you to pass money onto heirs without incurring additional taxes. Any money invested in on one can be treated as tax deferred income and will not have to be reported on your tax return. Even though it shares some of the characteristics of an investment plan most people should not use universal policies as investments.
Not a Good Investment for Most People
Universal life is not a good investment for most people because it is life insurance. Most of its benefits are only available to your heirs after you die. Even though you can save money in one you will not be able to get most of the money while you are alive.
In today’s world the average person is more in need of long term retirement income than life insurance. Many people are more in danger of outliving their retirement investments than of dying young. Suppose Jock purchased a universal life policy when he was 55 and put $50,000 in it. Then he lived to 94 years old, Jock would not have that money cover expenses such as nursing home care when he got older. He could cash in the policy but what happens if he becomes incapacitated.
Instead of a Universal life policy Jock could have purchased an annuity. The annuity would provide a life insurance benefit but it could have also provided Jock with several hundred dollars in additional every month until he died. That money would be coming into help Jock with day to day bills and augment his Social Security. Best of all Jock would still have life insurance to leave to his heirs or clear up his bills when he dies.
Something that younger people should remember is that the tax-deferment in insurance policies comes with a catch. The IRS will charge anybody under 59½ years old a 10% tax penalty on funds taken out of insurance policies. That means a person would actually pay more taxes on that money if he took it out.
When Universal Life Would be a Good Investment
There are some people for whom universal life can be a good investment. These are people that would be purchasing a large amount of life insurance anyway.
An example of such an individual is Cliff, a wealthy physician. Cliff has several children and quite a few liabilities. He owns a practice, a house, a summer home, a ski condo and several cars. Not surprisingly he carries a large amount of life insurance. Since Cliff spends a lot of money on life coverage to begin with it makes sense for him to take advantage of universal coverage. He can use to greatly increase what he can leave to his kids.
Only use universal life as an investment when you would be purchasing life insurance anyway. If you have no need of a large amount of life coverage investment vehicles such as IRAs or annuities make more sense.