Universal life insurance
What is universal life insurance?
A universal life insurance policy always incorporates a investment vehicle so your tax-free premium installments can build up the cash value of your policy. Note that not all whole life policies have this option.
Who benefits from this type of policy?
Only people who anticipate leaving the investment untouched for the maximum period of time should consider this option. The investment return does not begin to show any real benefits for many years. But you have to ask yourself why you might want a larger cash value when you are eighty or more.
What are the potential problems?
When you sign up for this type of policy, you are committing yourself to paying annual fees to the insurance company to manage the investment of your cash value. These fees are payable no matter whether the investments produce good or bad results. If you look at the history of how well these investments pay off, you will discover that, almost without exception, you would do better if you invested in the stock exchange and left your money to accumulate value in the blue chip stocks. As a general rule, you should not buy these policies as an investment vehicle. The better strategy is to buy a cheaper whole life policy and invest the difference in the safest stocks you can identify. Indeed, running a 401K or buying an annuity represent better value for investment options.
Are the tax benefits valuable?
The money used to create the cash value is paid in gross so, when you draw it out or borrow it, you are receiving the money tax free. Except, of course, if you only borrow it, you have to pay it back and pay interest while you have it. That wipes out the tax advantage. Similarly, if you surrender the policy and draw out the money, you are giving up future gains.
Should you borrow the equity in your home and invest it in an insurance product?
No. You will almost certainly pay more in interest on the loan than you will earn as investment income from the insurance company.