If you’re like many of my clients, at some point, an insurance salesperson will approach you and try and convince you that you need a universal life insurance policy. They may even call themselves an “advisor” or “financial planner” in the process.
In some cases, they’ll volunteer to do your financial planning for you, for free, if you only buy that universal life policy.
I’m here to tell you that they’re wrong. They’re not fiduciary financial planners or advisors (and they get a nice fat commission check when they manage to sell policies to you). And their “financial planning” is far from free because you’ll overpay for insurance you don’t even need.
Most people do not need universal life insurance, and those who buy universal life are proud owners of a financial product that is not the best fit for them.
Universal Life Insurance Is Not an Appropriate Investment Vehicle
This all may sound hard to believe because life insurance salespeople do an amazing job at pitching you on their products. They are salespeople, after all — it’s their job to sell you on what they have to offer!
One of their favorite lines is that universal life is an investment that can both protect your family and increase your wealth. While the right kind of life insurance can protect your dependents from financial hardship should you pass away while they rely on your income, insurance is not an investment.
It’s a product designed to do just that: protect your family from a hardship they might otherwise face if you (and your income) were not around to provide for them.
If you want to invest, you need to contribute to your 401(k) and Roth IRA. If you’re maxing out both those accounts, consider opening a taxable brokerage account and fund that as well.
That’s how you invest.
You Might Need Insurance — But You Don’t Need Universal Life Insurance
None of this is to say you don’t need life insurance. You very well might — and you definitely do if you have children or other dependents that rely on your income (which could include your spouse, even if they earn their own income too).
In this case, you likely need term life insurance which is very different than universal life. In both cases, these insurance policies do protect your beneficiary from financial hardship in the event of your death.
But term life insurance does this for a specific term, or set number of years (hence the name) and for a much, much lower cost. Here’s a quick rundown of the differences between the two:
Term Life Insurance
Universal Life Insurance
|You get to choose how long your policy is — and therefore, how long you pay for it.||These policies last your entire life, no matter what — even if your insurance needs change.|
|Term life is very affordable, with low monthly premiums.||Universal life is extremely expensive, with high fees that eat away at its cash value.|
|You can’t borrow against the policy or get dividends from it — which you don’t need, because this is insurance, not an investment!||You could borrow against universal life and some policies offer dividends, but you can usually get a better return through proper investing within retirement or brokerage accounts.|
There’s a chance you don’t need any life insurance at all if you’re single, childless, and debt-free with no one relying on your income to survive. You certainly don’t need universal life insurance if you don’t even need a term policy!
Is Universal Life Bad and Out to Get You?
All this being said, there are cases where universal life insurance can make sense. But these instances are rare and usually involve very specific circumstances.
Extremely wealthy, high net worth families may want to consider this. You can use a universal life insurance policy to create liquidity — as in, cash outside of all your other wealth — that your beneficiaries can use to pay off expected estate taxes when you die.
You might also at least evaluate universal life if you have a special needs child or a dependent with special needs. It’s not automatically the right choice, but there are some instances where it could make sense depending on how the rest of your accounts and trusts are set up.
If You Need Insurance, You Probably Want to Stick to Term
For the vast majority of us, however, term life insurance provides the coverage we need at a low, affordable cost.
You’re better off getting a policy that only provides you with the coverage you need, when you need it — which is generally as long as you have minor children or family members who need your income.
If you don’t have kids, you and your spouse may not need any insurance at all (although it might make sense to at least consider disability insurance, which protects another important asset: your income while you’re still alive).
Then, with the cash you saved avoiding a overly expensive, high-fee universal insurance policy, invest in true investment accounts, like 401(k)s and Roth IRAs, to grow your wealth over time.