The Affordable Alternative
to Term
As baby boomers age, many are realizing that TERM insurance—which
seemed like such a bargain at one time—is not the best protection
for folks likely to live into their 80s and 90s. However, as your
retirement income diminishes, the higher cost of whole life forces
many to accept a smaller face value than they would like to leave
to a spouse or other family members.
The inexpensive alternative is Universal Life (UL).
A UL is a type of policy that has a savings accumulation and a
life insurance side. The cost of insurance and fees are paid out
of the accumulation, not directly out of your premium. Your premium
goes into saving where it has a chance to collect some interest
prior to paying your cost of insurance.
Because of the way it is set up, UL is usually less expensive than
whole life—significantly so if you are a non-smoker. Over
time, it may also build a higher cash value than whole life. And
if funded properly, it will last till age 100 with little or no
increase in premium.
Universal Life has some additional features that you won't
get with either Term or Whole Life.
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It is a completely
flexible policy. You can increase or reduce your premium, put
in an extra premium payment, take some money out of the savings
for an emergency, and even adjust the face value. You just have
to remember that you must always leave enough in the cash accumulation
part to pay the cost of insurance and fees. Your company can
give you a table that will show you what the cost of insurance
will be as you get older.
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If you no longer
need the policy as life insurance, you can do a 1035 exchange
converting the policy to an annuity which will continue to grow
but will eliminate the need to pay a premium. You can do this
with whole life also, but most whole life policies do not allow
you to "dump in" additional money in the early years just for
the purpose of building the savings. A UL does.
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You can start a UL
with very little money, called the "minimum premium." Within
the first three years, you will want to increase your premium,
or you will have bought yourself a policy that will be exhausted
in about five years, at which point you will have to increase
your premium or lose the insurance. However, as long as you
don't forget that you will have to increase the premium, this
adjustable feature allows you to protect your family at a much
lower cost than whole life.
- If you choose to
do so, you can borrow against the cash accumulation rather than
just taking the cash. Then the interest only will be deducted
from the cash accumulation, unless you pay it yearly. However,
as long as you have enough money over the amount of the loan to
pay the cost of insurance, the loan will have no impact on the
face value of the policy.
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