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How Does Universal Life Insurance Work?

By Edited Mar 5, 2016 0 0

When you read a universal life (UL) insurance contract or proposal before you purchase it, there are a few things you need to pay attention to, or you will end up paying too much for something you don't need, for the rest of your life, because this product is permanent. The selling point of universal life insurance is its flexibility, but the real point is that you have to pay for the extra flexibility. Every bell and whistle that comes with the product has to be paid by someone, and you are that someone.

You can stop paying for the policy if the fund in the policy is sufficient. The fund comes from part of your premium, but it doesn't belong to you. You can borrow from the fund if you need money urgently, but you have to pay interest for the loan. Why should you pay extra to buy a cash value fund in the policy if it doesn't belong to you anyway? But that is how this product works. If you find it bizarre, you are right. You should negotiate with the agent for something better, or bypass the agent and go straight for the best insurance product online. This is a decision that you really need to believe in yourself, and not some experts who have a vested interest in your purchase.

The proposal of the UL plan will tell you how much the administrative costs are, how much the insurance costs are, and how your fund is not guaranteed to make money. I already told you that the investment part isn't really relevant anyway, because it doesn't belong to you. As for the insurance, it is term insurance, which often increases in most UL policies. This is when the diligence and alertness of the customers can pay off. When customers find out it is an increasing term insurance, the agents usually will make it level term. This is their tactic to make the most money out of you. If you don't ask, they don't tell. They will only tell you why you should buy more.

The insurance costs and administrative costs are subjected to change. They can increase anytime if the contract allows. The agent will usually show you the smallest figure of the costs at the beginning stage, and give you a 10% to 12% expected rate for the growth of your fund. In reality, the costs always increase and the return rates are much lower than what you can earn from other investment vehicles on the market.

What is the better alternative? Keep it simple and buy term life insurance online. You can bypass the agent and go straight for the product you need. Term life insurance is the best, because it will offer proper coverage that will take care of the needs of your family if you happen to die prematurely and it is cheap. You can save a lot of money with term insurance, and invest the money you save into the market. The historical average rate of the market is 12%. You can do better than that if you are a business owner or a competent investor.

The insurance company and the agent will try their best to keep your business. They will even make the universal life insurance plan function like term life insurance if you push hard enough, but their ultimate purpose is to keep you locked in for life. Financial freedom has to be fought, so confront them and reject them. Independent and reputable financial experts always recommend the term life insurance. You should buy at least a 30 year term, and invest your money until you have enough money to support retirement. You will be able to be self-insured. The money you save and accumulate will greatly exceed the money you put into a cash value life insurance, such as the UL, and this is called the "Buy Term Invest the Difference".

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