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universal life insurance pros and consThere are dozens of different insurance products, each of them has their own set of advantages and disadvantages. Trying to decide which is best for you can be a long and complicated process, but it’s vital that you understand all of the options and what they provide.

One of the insurance products receiving some interest in recent years has been the universal index life insurance policy. These life insurance policies are permanent life insurance policies, build cash value over time, and provide the ability to take advantage of stock market gains.

While universal index life insurance policy can be a way to aggressively grow your cash value in a life insurance policy over time, it’s important to be aware that there are drawbacks to these types of life insurance policies as well.

How Universal Index Life Insurance Works

As with most life insurance policies, your premiums go to the insurance company, which then invests the money in bonds, stocks, funds or other investments. The insurance company makes money, hoping to make enough from premiums and investments that it can afford to pay out benefits when the insured’s life ends.

With a universal index policy, part of your premium is invested in a fund that is connected to a particular index. (Many policies are indexed to the S&P 500.) When that index does well, your cash value builds faster, and you earn more money for that year, to go into your cash value fund. If the index doesn’t do well, your cash accumulates much slower.

Many policies allow for a flexible premium, and you can choose to add more in order to help you build up your cash fund. Most universal index life insurance policies come with a guarantee that you will be credited a certain amount each year — regardless of how well the index does. This might be a very low number, such as 1% or 2% (or even a guarantee that you just won’t lose money), but it’s still an assurance that you won’t lose cash value.

Additionally, it its worth noting that most of these types of life insurance policies also have caps. This means that you won’t end up growing your cash value by as much as you would like if the index does really well.

Pros and Cons of Universal Index Life Insurance Policies

One of the biggest advantages of a universal index life insurance policy is the potential for growth, while you receive protection from volatile markets. Your cash value, depending on the state you are in, might also come creditor protection. Plus, it is usually possible to withdraw money from your cash fund without running into the same penalties and restrictions that come when you withdraw early from a tax-advantaged retirement account.

On the downside, though, is that most of these policies come with fairly high fees. The commissions are often front-loaded, so it can take years before your cash fund sees significant growth. Later in life, you might not have enough value in your cash fund to pay the premiums, and your premiums might go up if you want to keep the policy current.

And, of course, your gains are limited by the process used by the life insurance company to figure out how much you end up with from stock market increases. In some cases, you might be better off just investing in an index fund on your own, without doing it through an insurance policy.

Overall, I still can see a place where these type policies can make sense. Currently, I can no longer participate in a Roth IRA, so I’ve been looking for another potential option to  defer some money. An index universal life policy just might be the ticket. I’ll have a follow up post that shows what I bought and how much I’m paying.

The Alternatives

After reading about the pros and cons of Universal Index Life insurance policies, you may have decided that they aren’t the best option for you. Don’t worry, you aren’t the only one. They are complicated and confusing plans that have several pitfalls, but luckily there are several other great options that you can choose from.

The first and most popular option is the term life insurance. If you’re looking for the simplest and most affordable option, term life insurance is the way to go. These plans are effective for a predetermined amount of time, normally you buy them in 10,20, or 30-year terms. After that term is up, your policy is no longer effective, at that point you would have to apply for a new policy. Think of the term lengths as expiration dates.

Another common alternative is whole life insurance. It works similarly to term life insurance, but with one significant difference, but it’s permanent. Unlike with term, there is no pre-determined effective length, as long as you pay, these policies are in force. There are a lot of life insurance applicants that prefer the idea of being able to keep one policy for the rest of their lives, instead of having to reapply in the future. While it’s a nice advantage, the premiums are much higher.

Calculating Life Insurance Size

It’s important that you get enough coverage. Having too little coverage is almost as bad as not having insurance at all. Before you apply, let’s do some math.

When you die, all of your unpaid expenses are passed on to your family members. There are a lot of families that find themselves with massive debts. Before you purchase a plan, combine your mortgage, student loans, and other major expenses. This is your starting point.

The next step is to add up how much your family would need for basic expenses. Life insurance gives them the funds they need to recover from the loss without adding any additional financial strain.

Working with an Independent Agent

Everyone wants to save money any way that they can, and your life insurance policy is no different. If you go with a Universal Index Life insurance policy, or you go with a basic term life insurance policy, either way there are some techniques that you can use to save money.

There are thousands of companies on the market, not all of them sell universal indexed life insurance. Some companies offer much higher premiums for their indexed universal policies. You need to avoid those carriers. Luckily, we work with the highest-rated companies in the United States. We can bring all of the lowest rates to you, no calling, no answering the same question. Your time is valuable, it shouldn’t be spent sitting on hold with dozens of insurance companies.

Let’s help you find a cheap life insurance policy! If you want to get started, fill out the quote form on the side. We will deliver the best rates from off the companies near you.