Universal Life Insurance - The Swiss Army Knife

Between 30 and 50? This may be a great alternative to a 401k

There are Three Types of Universal Life Insurance

Fixed Rate

The insurance company invests the cash value component as part of its general portfolio and interest is credited to the account based on the performance of the portfolio. Fixed-rate universal life policies have a minimum interest guarantee. BTW - your money cannot lose money if the stock market drops (like a 401k can).

Indexed

The vast majority of new universal life policies are indexed universal life policies (IUL)—70% of UL policies sold in the first quarter of 2020 were IUL. Indexed policies offer consumers the potential for stock market gains without the risk of losing principal.

The cash value component is credited based on the performance of a financial index, such as the S&P 500. If the index goes up, the cash value is credited with a percentage of the gain, usually up to a cap or ceiling stated in the policy. If the index goes down there are no interest credits, and no losses to the cash value.

Variable

The cash value component is invested in mutual funds the policy owner chooses. The cash value is determined by the gains and losses of the mutual funds selected. If investments perform poorly, the cash value can decrease, and the policy could potentially lapse if losses are great enough.

Pros of Universal Life Insurance

Flexible Premiums
Flexible Savings component
Coverage can stay in force for life
Favorable tax treatment

Is Universal Life Insurance Right for You?

Anyone who has a need for a permanent life insurance policy should consider a universal life policy. Premiums can be adjusted (or paused) if necessary, and the cash value grows tax-deferred and can be accessed, in some cases, without tax consequences. Also, most universal life insurance products have a selection of living benefit riders to cover long term care expenses, supplement retirement income, and address other financial needs.

UL can also be a solid choice for young professionals who have or expect to have a need for insurance, want to lock in low rates while they’re young and in good health, and would benefit from the tax-deferred nature of the cash value account. In fact, if the cost of insuring you is low, you might find that the interest credited to your account covers the cost of insurance and policy charges.

In a low-interest rate environment, this example might be more likely with an indexed policy where interest credited is based on the returns of a stock market benchmark like the S&P 500.

Here is an example for someone under 50

Joe is 27 and his employer does not contribute to a 401K plan. Joe has a few options:

Joe can open his own IRA (not a 401K - those are only for employers to open). This will be with money he has already paid taxes on.
Joe can buy a universal life policy.
Joe has decided to buy a universal life policy for a few reasons.

a. He doesn't have any life insurance. He has been told that life insurance is always less expensive when a person is young. (the insurance piece)

b. He wants to start investing for the future. (the investment piece)

c. He can take out loans from the cash value - and he doesn't have to pay it back (there are nuances to this)