Explain Universal vs Term life Insurance Quotes?
Explain Universal vs Term life Insurance Quotes?
My wife and I just bought a Universal life insurance policy. We each have $100,000 in coverage. After talking to my parents, who are 59 and 58 years old and have term life, we think we are paying too much per month for premiums. Our agent showed us and told how the premiums we pay will partially go into a savings account and collect interest. This looked like a good thing and that is why we went with the Universal coverage. He also told us that the premiums for term would keep going up as we got older. My parents pay a combined $65/month for there life insurance (with $150,000 coverage each). My wife and I pay a combined $125/month. After talking to my parents and reading up on the difference between universal and term, it seems that the money that is suppose to be in a “savings account” with universal, might not be all it's cracked up to be. I know they gaurantee you a certain interest rate, but that is only if they perform and make the profits that they need to. My question is will there really be as much money in a “savings account” as the agent showed us, or will we cash out at the end and only get a few hundred dollars? Can you explain the difference a little better for me? Thank you very much for your time
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A Universal Life is like this way. You deposit money into an account. Every month the insurance company takes out the cost of insurance (called the mortality cost). The money on deposit does earn interest.
One thing is the cost of the insurance goes up every year like a term policy. You just never know it. That is because you just keep on making deposits into that account. And, the cost of the insurance just keeps coming out of that account every month. So, you never really even know the cost of insurance unless you ask.
Anyways, hope that was not too confusing. You now know more than most insurance agents know if you got what I said. Universal LIfe is a big rip off. Get out now while you still can. Your surrender charge, oh by the way, did your agent mention that there are early cancellation fees? The surrender charge may eat up what you have already paid into the policy.
Move on and find an honest insurance agent.
You don't mention your age, but I'm guessing it's around 30.
The short answer of the difference between universal life and term life is cash value. The advantage of cash value is that the universal life has the ability to grow a tax deferred and probably tax free return (I say "probably" because it is possible to not have the tax free return, but I doubt you would have any problems with that.)
With the cash value, you have the opportunity to keep your life insurance policy for your whole life. I don't know the length of term for your parent's policy, but their policy will increase in cost over the years and by about age 70 it will be so expensive they will not be able to keep the policies. Therefore, all the money they paid in term premiums they lose (effectively, they "rented" their insurance for 30 or 40 years instead of "buying" their insurance.)
The universal life does have "guaranteed" accumulation of cash value based on the current cash value and the premiums paid. That's regardless of how the company performs. If the company performs better, then you get more than the guarantee. Most companies have paid more than the guarantee every year. You can check with your company to see if that's true with them.
If you buy $100,000 20 year term, you will probably see the cost at around $20/month each. That's a lot less than the $65/month each now, but in 20 years it will double and in another 20 years it will go way above doubling.
So, think of your universal policies as policies you will have for the rest of your life unless you decide you want the cash. After 20 years and more you will probably receive all of your premiums back plus some return if you decide to cancel the policies. I don't know what the agent showed you as the effect of the cash value in 30 years or whatever, but it is likely a reasonable expectation. In other words, you can reasonably expect to have the cash value he/she showed you. It may be less; it may be more.
I know there are many entertainers on the radio such as Dave Ramsey and Suzie Orman who say "Never buy permanent life insurance. Only buy term." This is *not* a good recommendation for everyone. It is a good recommendation for some, neutral recommendation for others and *bad* recommendation for still others.
I don't know your specific situation, but if you are in good health, in the 30-year-old range, can afford the premiums without having to skip dinner and the company is a well-known, grade-A insurance company, you probably should keep the policies.
My advice, if you meet those items just mentioned, is to keep the policy and plan to pay even a higher premium when you can (I know this sounds dumb right now). But when your 60 you probably will not be making premium payments anymore and will have the life insurance well past age 100 if you live that long. I have many clients who wished they had purchased a permanent policy when they were in their 20s or 30s instead of term. I don't have any clients who are past the age of 60 and thought they had made an error when they purchased their permanent policies 30 or more years ago.
You don't want a "good rate of return" on your life insurance. To have that, buy a 1-year term policy and get in an accident after your first payment – but that's not a plan any of us want. What you should want is a plan where you pay a little more now, build cash value and then quit paying on the policy when everyone else is complaining about the cost of their life insurance going up.
Remember I don't make anything off of your policies and am giving you advice as if you were sitting in my office.
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Hope this helps.
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