Universal Live Insurance (ULI) is an insurance policy with a cash savings value attached to it. The premiums are set at a fixed or sometimes flexible rate and are paid into the accounts principal fund. The Cost of Insurance (COI), which is what you are actually being charged for the insurance coverage, is debited from that principal. Because at the onset of a policy the premiums are more than the COI, the principal gains value through premiums as well as through interest.
As the insured individual ages the COI goes up. At some point it will exceed the premiums at which time interest and if necessary principal funds will be used in addition to the premiums to pay the COI.
ULI policies are being marketed heavily by insurance companies, but does that mean they are a good deal for you? Let’s do some math.
If a 30 year old man buys a $500,000 ULI policy the premium will be in the neighborhood of $400 a month. With a good interest rate and assuming a steady rate of ULI increase from 30 to 60, at after 30 years of paying premiums the insured party will have accumulated $200,000 in principal. If he keeps the policy beyond that point the principal will began to decline as the COI starts to exceed the premium and place a drain on the principal.
If, in the example above the insured person dies at age 55 his beneficiary will receive $500,000 per the policy benefit. So what happens to the principal? GONE, part of the “management cost of the policy”. So with this arrangement, if the insured outlives the policy it pays $200K, if not it pays his beneficiary $500K.
There is a better way.
A 30 year old male can take out a 30 year $500K flat term policy for about $57 a month. That’s quite a drop from $400 a month but of course the term policy doesn’t have a savings plan built in. Fortunately, most people who can buy insurance can also start investment accounts. So what would happen if our 30 year old bought the term policy and put the other $343 a month in a Roth IRA, and invested in some good growth stock mutual funds averaging at least 12% interest, a number that isn’t hard to find by the way?
At the end of the 30 years the money in the Roth IRA (which grows tax free) would have grown not to the $200,000 that the ULI would have but to a whopping $1,200,000. There would be no need to continue the policy beyond this point because the investment principal is now more than double the policy!
But what happens if the insured person dies at 55? Well, the beneficiary would receive the policy benefit of $500K just like with the ULI, but the Roth IRA would be worth $638,374 for a grand total of $1,138,374. According to my math that is much better than $500K.
So who needs a ULI.
Must be for people who can’t do math!