With a universal plan, you pay a higher monthly premium in exchange for a long period of coverage, usually for permanent lifetime coverage, but you can set the period of time and the benefit. Your premiums may increase or decrease throughout your life. Universal policies include a tax-deferred savings vehicle, like whole life policies. Whatever is invested, you can cash in or borrow against. Universal life insurance offers more flexibility than whole life, allowing you to increase or decrease your death benefit, for example.
My Two Cents!
I do not like whole life or universal life insurance, in general (especially for young, healthy people). I believe insurance should be used for insurance purposes and it’s best not to try to make an insurance vehicle a savings vehicle. Typically, the return on your investment is not good — you are better off actually investing that money in the market instead of an insurance policy. There may be reasons for getting a whole life or universal policy now if you think you won’t be insurable later. Talk to your financial professional to determine what’s right for you. But make sure your financial planner is fee-only when you do this. If she is fee-based or commission based, then she may actually try to see you one of these policies. Fee-only financial planners have a fiduciary duty to act in your best interest.
How much life insurance do you need?
You need enough life insurance to cover your dependents’ financial needs for the next 10, 20, or 30 years, depending on their age. The critical question is: how much income would your dependents need if you died?
To determine a rough estimate of how much life insurance you need, do the following calculation.
- Determine your after-tax, take home, yearly income. This is the amount of after-tax income your dependents will need if you die.
- Divide your take home income by an approximate rate of return (such as 5%).
- This equals the lump sum your dependents need if you die, and is thus how much life insurance you should have. After receiving this lump sum, your dependents should invest it, which will yield yearly income they need.