Home » Finance » Insurance

Insurance: Beware Of Universal Life

Aug 17, 2007
Has a life insurance agent suggested that you buy 'permanent' insurance such as Whole Life, Universal Life or Variable Universal Life? The reasons they give seem so compelling, but are they in your best interest? Here's an explanation of the basics, plus what the insurance agent isn't telling you!

There are two broad categories of life insurance--term and permanent. The basic idea behind life insurance is that if you die prematurely, there will be a pot of money there to take care of your loved ones. That pot of money is referred to as the 'death benefit'.

The cost of life insurance is based on your age, your gender and your health. The insurance company bases the premium on the risk that you will die. The older you are or the poorer your health, the more expensive the insurance will be.

The 'raw' cost of insurance goes up every year because the risk of death increases every year. Term and permanent insurance approach the payment plan differently. With level term, these increases in cost are spread out over 10, 20 or 30 years and the premium is kept the same. If you renew your policy at the end of the term, your insurance costs will increase.

With permanent insurance, your premium stays the same as long as you own the insurance, up to age 100. That way, you shouldn't be in a situation where it becomes too expensive as you age. Initially you pay more than the raw cost of insurance and that money is kept in reserve. Once the raw cost of insurance is greater than your premium, the difference is taken from the reserve.

The difference between Whole Life, Universal Life and Variable Universal Life has to do with the return you earn on that money while it's kept in reserve. Whole and universal essentially pay interest while variable universal allows you to 'invest' that reserve in mutual-fund-like accounts.

On the surface, it may seem that there shouldn't be a lot of difference between the premium on 20-year term and a universal policy with the same death benefit. But let's look at some real numbers. The annual premium for a 45-year old man in excellent health for $1,000,000 in coverage is $1400 per year for 20-year term. That man would pay roughly $8,000 a year for permanent insurance. That's right--about $6600 more every year.

That reserve in the permanent insurance can become a substantial over time, so they give you the ability to borrow the money held in reserve. This has spawned the use of permanent insurance for needs other than the death benefit, such as a way to build a retirement nest egg. The 'ploy of the day' is that you should take all the equity out of your home and put it into a universal life insurance policy because it will allow you to build your wealth more quickly. (I expose the fallacy of that argument in a future article.)

What your insurance agent isn't going to tell you is that the commission on permanent insurance can be around 70% of the first year premium and then maybe 5% a year on additional premiums. Commissions on first year term premiums can be as high as 100%. In our example above, the agent will make about $5600 on permanent versus only $1400 on the term. This higher commission is a tremendous incentive for agents to sell permanent insurance instead of term.

The result is a huge conflict of interest between the needs of the client and the desires of the agent. I would like to think that every agent will always do what's in the client's best interest, but we know that's not the case. And most agents are convinced that term is a waste of money and that permanent life insurance is the better choice. I don't.

I believe that permanent life insurance should only be used in special situations, such as to cover estate taxes due at death. I do not think it should be used when you want to provide for your family in the event of a premature death. I don't think it should be used as a way to 'build wealth' or as a type of retirement plan. In my next article, I'll explain why.
About the Author
Nationally-syndicated financial columnist and Certified Financial Planner Jeffrey Voudrie provides personal, in-depth money management services and advice to select private clients throughout the USA. He'll answer your financial question FREE at http://www.guardingyourwealth.net/
Rating:
Please Rate:
(Average: Not rated)
Views: 146
Print Email Report Share
Article Categories
    • Artists
    • Gambling
    • Humanities
    • Humor
    • Movies
    • Music
    • Photography
    • Tattoos
    • Television
    • Classic Cars
    • Motorcycles
    • Recreational Vehicles
    • SUVs
    • Trucks
    • Vans
    • Branding
    • Business Opportunities
    • Careers and Jobs
    • Corporate
    • Customer Service
    • Direct Mail
    • Entrepreneurship
    • Ethics
    • Financing
    • Franchising
    • Home-Based Business
    • Human Resources
    • Import and Export
    • Leadership
    • Management
    • Market Research
    • Marketing and Advertising
    • Negotiation
    • Network Marketing
    • Networking
    • Organizational
    • Presentation
    • Project Management
    • Public Relations
    • Small Business
    • Strategic Planning
    • Team Building
    • Telemarketing
    • Training
    • Data Recovery
    • Databases
    • Games
    • Hardware
    • Networks
    • Operating Systems
    • Programming
    • Security
    • Software
    • Spyware and Viruses
    • Ask an Expert
    • College and University
    • Home Schooling
    • K-12
    • Languages
    • Online Education
    • Psychology
    • Coffee
    • Cooking
    • Gourmet
    • Recipes
    • Wine and Spirits
    • Acne
    • Aerobics
    • Alternative Medicine
    • Beauty
    • Cancer
    • Cosmetics
    • Depression
    • Diabetes
    • Diseases and Conditions
    • Fitness Equipment
    • Fitness
    • Hair Loss
    • Heart Disease
    • Medicine
    • Men's Health
    • Muscle Building
    • Nutrition
    • Skin Care
    • Supplements and Vitamins
    • Weight Loss
    • Women's Health
    • Yoga
    • Arts and Crafts
    • Babies
    • Collecting
    • Elderly Care
    • Genealogy
    • Hobbies
    • Parenting
    • Pets
    • Pregnancy
    • Woodworking
    • Feng Shui
    • Gardening
    • Home Appliances
    • Home Security
    • Interior Design
    • Landscaping
    • Affiliate Programs
    • Article Marketing
    • Auctions
    • Audio
    • Banner Advertising
    • Blogging
    • Broadband
    • Domain Names
    • E-Books
    • E-Commerce
    • Email Marketing
    • Ezines and Newsletters
    • Forums
    • Internet Marketing
    • Link Popularity
    • Pay-Per-Click
    • Podcasting
    • RSS
    • Search Engine Marketing
    • Search Engine Optimization
    • Security
    • Social Media
    • Spam
    • Video
    • Viral Marketing
    • Web Design
    • Web Development
    • Web Hosting
    • Copyright
    • Cyber Law
    • Intellectual Property
    • National, State, Local
    • Patents
    • Regulatory Compliance
    • Trademarks
    • Buying
    • Selling
    • Baseball
    • Basketball
    • Boating
    • Cycling
    • Extreme Sports
    • Fishing
    • Football
    • Golf
    • Hockey
    • Hunting
    • Martial Arts
    • Running
    • Scuba Diving
    • Soccer
    • Swimming
    • Tennis
    • Dating
    • Divorce
    • Marriage
    • Weddings
    • Astrology
    • Buddhism
    • Christianity
    • Faith
    • Hinduism
    • Islam
    • Judaism
    • Meditation
    • Metaphysical
    • New Age
    • Cable and Satellite TV
    • Cell Phones
    • Communication
    • Gadgets and Gizmos
    • GPS
    • Satellite Radio
    • Video Conferencing
    • VoIP
    • Addictions
    • Coaching
    • Goal Setting
    • Motivational
    • Stress Management
    • Time Management
    • Clothing
    • Electronics
    • Fashion
    • Gifts
    • Jewelry
    • Causes and Organizations
    • Environment
    • History
    • Holidays
    • Men's Issues
    • Nature
    • Philosophy
    • Politics
    • Women's Issues
    • World Affairs
    • Air Travel
    • Camping
    • Cruises
    • Destinations
    • Outdoors
    • Article Writing
    • Book Reviews
    • Copywriting
    • Fiction
    • Non-Fiction
    • Poetry
    • Quotes
    • Screenplay
    • Tools and Resources