Author Topic: Should I get rid of Universal Life Insurance?  (Read 6290 times)

skiddieleet

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Should I get rid of Universal Life Insurance?
« on: March 07, 2015, 11:02:22 PM »
A couple years ago when I was still single I got talked into opening a Universal Life policy for $200K coverage and $95 a month premium.  I liked the idea that part of what I was contributing I would get back since I'm relatively young and hope to outlive a term life policy.

Now I'm married, and $200K doesn't seem like much coverage and I'm trying to cut down my monthly expenses as much as possible and I really don't like that $95 a month.

I'm looking at getting a 20 year term life insurance for $500K.  It will only be about $24 a month.  I've already started the process and it's almost finalized.  I keep trying to cancel my universal life policy, and they always give me reasons I shouldn't.  Their last reason was a good one about waiting for the results of my medical eval on the term policy.

Once the term policy is in effect, I plan on cancelling the universal life policy.  I also have free life insurance through my work that is double my salary (~160K).  That, plus term, plus my other assets make me feel like my wife will be taken care of.

Is there any reason I shouldn't cancel my Univeral life policy?  Their other argument is that it is forever and the term ends and my rate will be a lot higher in 20 years.  I plan to be FI  in 15 years or less, and I don't think people who are FI have life insurance.

MDM

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Re: Should I get rid of Universal Life Insurance?
« Reply #1 on: March 07, 2015, 11:09:41 PM »
I plan to be FI  in 15 years or less, and I don't think people who are FI have life insurance.
Correct.  Once your family's financial well being becomes independent of your ability to earn money, why would you pay for life insurance?

ltt

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Re: Should I get rid of Universal Life Insurance?
« Reply #2 on: March 08, 2015, 07:44:56 AM »
Yes, do a term policy.  Once children are born, add some more term insurance to cover through 20 years or so.  When our children were born, we took out 15-year term policies, thinking that our children would be old enough to work, earn their own way through college, etc. as we/they got older if something ever happened to us.  We'd be able to pay off the mortgage, also.  We are pretty much at the end of our 15-year term policies and the rates are going to increase greatly.  We will drop our term policies then.  If I had thought it through more, I would have done a 20-year term instead just to make sure there was enough to get them through college in case something happens.  As it stands now, there is enough money to cover all four children at a two-year community college/trade school.  Our mortgage has been paid off for several years. 

We, like you, also have life insurance through my husband's employer.

My grandfather never carried life insurance, and I never understood why when I was younger.  But it was because he had so much in cash, his child was grown, his house was paid for, and there was enough money to pay the funeral expenses.

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Re: Should I get rid of Universal Life Insurance?
« Reply #3 on: March 08, 2015, 07:57:53 AM »
First, DO keep your present policy until you've got a firm commitment on its replacement.  Don't let ASSuming make a you-know-what out of you.

Second, term life is the way to go.  Life insurance is not for investment (no matter what the whole life insurance policy salesman tells you).

Third, have you looked into the advantages of getting a survivor policy instead of just one on yourself?  Before we became FI, we realized that the biggest financial problem we might have would materialize if either I or my wife died with a big mortgage still hanging over the head of the survivor.  So what we got was a survivor term policy: it is ONE policy that covers both husband and wife, and pays the survivor.

Once we became FI, we did drop that policy.  But it was a good deal while we had it.

Good luck.

Bob W

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Re: Should I get rid of Universal Life Insurance?
« Reply #4 on: March 08, 2015, 08:20:59 AM »
Of course you should.

Cheddar Stacker

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Re: Should I get rid of Universal Life Insurance?
« Reply #5 on: March 08, 2015, 08:24:47 AM »
Yes. And you likely don't need a 20 year term either. 10 should be enough based on the facts.

skiddieleet

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Re: Should I get rid of Universal Life Insurance?
« Reply #6 on: March 08, 2015, 10:50:46 AM »
First, DO keep your present policy until you've got a firm commitment on its replacement.  Don't let ASSuming make a you-know-what out of you.

Second, term life is the way to go.  Life insurance is not for investment (no matter what the whole life insurance policy salesman tells you).

Third, have you looked into the advantages of getting a survivor policy instead of just one on yourself?  Before we became FI, we realized that the biggest financial problem we might have would materialize if either I or my wife died with a big mortgage still hanging over the head of the survivor.  So what we got was a survivor term policy: it is ONE policy that covers both husband and wife, and pays the survivor.

Once we became FI, we did drop that policy.  But it was a good deal while we had it.

Good luck.

When talking to my life insurance provider, they asked if I'd considered taking a policy on my wife.  Right now I'm the only one working so I hadn't really thought about it.  The guy made a decent point about if we had kids and I had to have them in daycare though.  However, I'm assuming most people only use daycare until the kids start school.  And I'm really really hoping my wife survives me and we both live long and happy lives.  Plus I can afford daycare, it will just be a big chunk out of my savings rate.

I guess right now I'm fairly new to MMM (discovered it a couple months ago) and I'm trying to eliminate all unnecessary monthly expenses, so I'm looking forward to one cheap term policy if the company will let me drop the universal :) (I know they have to, but they're very reluctant).

Yes. And you likely don't need a 20 year term either. 10 should be enough based on the facts.

Yeah, this thread has made me think about that.  On the other hand, when we have children, I think I need 20 years and I'm not sure 500K is enough.  I guess we'll cross that bridge when we get there.

caliq

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Re: Should I get rid of Universal Life Insurance?
« Reply #7 on: March 08, 2015, 11:29:20 AM »
If you had kids, then your wife died, and you were the only one working, you'd need them in day care even if they were in school.  Unless your job is flexible enough to allow you to only work during school hours every day and take time off whenever a kid is sick.  And of course, those reduced hours would have to provide you enough income to live on, and save if you still wanted to pursue FIRE.   Plus there's all the other stuff a SAHP does, like clean and cook and handle bills and household repairs and driving kids to appointments and activities and whatever else.  Honestly, now that I list all that out, being a single parent sounds utterly overwhelming.  So, I don't think you should discount the idea of life insurance for both parents when the time comes.   Of course everyone hopes to never need life insurance, but that doesn't mean you shouldn't objectively and rationally plan for the possibility that you might need it.

skiddieleet

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Re: Should I get rid of Universal Life Insurance?
« Reply #8 on: May 16, 2015, 10:26:28 PM »
So I have my term policy in place now, but haven't dropped my Universal policy yet.  I'm intrigued by the "4%" rate of return.  I really don't now how it works.  I've actually had it over 3 years now, and my cash value is about $500 less than how much I've paid into it.

I thought I heard somewhere that initially a lot of your payments are fees and other things and as you have the policy longer more of your premiums go to the cash portion.  Is that true?  Should I consider keeping this policy?

I also remember when I got it trying to lock it in because they were about to lower the minimum rate of return to 1% and I'm pretty sure I locked in a 3.75% minimum.  How do I take advantage of this 4% interest rate?  Should I be overpaying on my premium?  I know index funds that follow the market can get me a better return, but this is a pretty high rate, and I believe I have a guaranteed minimum.  Someone talk some sense into me.

Goldielocks

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Re: Should I get rid of Universal Life Insurance?
« Reply #9 on: May 16, 2015, 10:45:14 PM »
The one nice thing about universal life insurance is that it is a guaranteed return...  It can also be used to transfer money to others after death...

The bad thing is if the rate of return is less than what you can get on your own.

Check your policy....
How much back would you get tomorrow?
How many months remain?
How much can you get at the end, and what date is that?
Can you get a lot out at a good return before your death?
Would you like money after death?


Then compare this to an investment in fixed income funds, of the $ you can extract today, plus ($95-$24) per month, (assumes the cost of the insurance benefit is $24/ mo for simplicity). and check the future value at the same time upon withdrawal as above.

It will likely be low, now you need to decide if the other benefits are worth it.

FYI... I would never purchase this unless I had a complex tax or estate transfer strategy....  But you may be different, and if you are nearing the end of payments, maybe not so bad to continue.

MDM

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Re: Should I get rid of Universal Life Insurance?
« Reply #10 on: May 16, 2015, 10:45:41 PM »
I really don't know how it works. 

...my cash value is about $500 less than how much I've paid into it.

Someone talk some sense into me.

You might reread the first two lines quoted above, then have a conversation with yourself....

If, despite what your instincts seem to be telling you, you decide to keep it...set up a simple Excel file that predicts what the value will be in, say, 6 months.  If your prediction matches what the insurance company tells you at that time, then there is a good chance you do understand it - and vice versa.  Then decide on the merits of what you do understand.

Insurance should be for insurance, and investment for investment.  Usually not good to use one for the other purpose.

Goldielocks

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Re: Should I get rid of Universal Life Insurance?
« Reply #11 on: May 18, 2015, 05:18:58 PM »
I really don't know how it works. 

...my cash value is about $500 less than how much I've paid into it.

Someone talk some sense into me.

You might reread the first two lines quoted above, then have a conversation with yourself....

If, despite what your instincts seem to be telling you, you decide to keep it...set up a simple Excel file that predicts what the value will be in, say, 6 months.  If your prediction matches what the insurance company tells you at that time, then there is a good chance you do understand it - and vice versa.  Then decide on the merits of what you do understand.

Insurance should be for insurance, and investment for investment.  Usually not good to use one for the other purpose.

Your value should be less because you have at least $24 per month worth of insurance during this time...  If you subtract $24/ no x # months you have paid into it.... Is the value now less?

ender

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Re: Should I get rid of Universal Life Insurance?
« Reply #12 on: May 18, 2015, 07:01:22 PM »
I really don't know how it works. 

...my cash value is about $500 less than how much I've paid into it.

Someone talk some sense into me.

You might reread the first two lines quoted above, then have a conversation with yourself....

If, despite what your instincts seem to be telling you, you decide to keep it...set up a simple Excel file that predicts what the value will be in, say, 6 months.  If your prediction matches what the insurance company tells you at that time, then there is a good chance you do understand it - and vice versa.  Then decide on the merits of what you do understand.

Insurance should be for insurance, and investment for investment.  Usually not good to use one for the other purpose.

Your value should be less because you have at least $24 per month worth of insurance during this time...  If you subtract $24/ no x # months you have paid into it.... Is the value now less?

How old is the OP?

$24/month for only 200k seems really high. I'm paying about $10 more than that for $750k and I don't think we even got the best deal.

nobody123

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Re: Should I get rid of Universal Life Insurance?
« Reply #13 on: May 18, 2015, 08:04:50 PM »
When talking to my life insurance provider, they asked if I'd considered taking a policy on my wife.  Right now I'm the only one working so I hadn't really thought about it.  The guy made a decent point about if we had kids and I had to have them in daycare though.  However, I'm assuming most people only use daycare until the kids start school.  And I'm really really hoping my wife survives me and we both live long and happy lives.  Plus I can afford daycare, it will just be a big chunk out of my savings rate.

You don't have kids now, so you don't need a policy in case she passes.  Is she just not working right now, or has she never worked?  If she's had a job before, take a look at her Social Security statement and see what the survivor benefits would be.  Each kid will get a monthly amount, as will you as a surviving spouse caring for the kids, until they are 17 or so.  If that amount is enough to cover daycare, you might not need to cover your wife at all.

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Re: Should I get rid of Universal Life Insurance?
« Reply #14 on: May 19, 2015, 03:47:08 AM »
Universal Life is probably the worst kind of life insurance, it's basically based on the premise that the cash value of your policy goes to pay the premiums over your life span. If you continue to pay until you're old it will have no cash value and no payout unless you make huge payments. You would be much better off with a 10 convertible term policy. At the end of 10 years you could extend your coverage for another 10 years but the premiums would be a fixed cost and you would know what they were from the very beginning.