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Insurance

Did you know there are 8 types of homeowners insurance? Here are the details on each type of policy, along with what you need to know to make sure your home is protected.

homeowners insurance

When it comes to homeowners insurance, all too many of us don’t know what we’re really buying. You hear about this all the time during major natural disasters. People think they are covered in the event of a flood, only to find out that they are not. Same goes with an earthquake.

To avoid this kind of tragedy, you need to know what your homeowners insurance covers. Specifically, you want to know what you’ll receive in the event of a total loss, and any additional coverages you might need. That’s where we’ve done the work for you. Here, we break down the types of homeowners insurance policies by several different categories.

The Basic Types of Homeowners Insurance Policies

Insurance companies have their own shorthand for different types of standard homeowners insurance policies. There are eight basic types. While they can vary from company to company, these eight types describe the kinds of hazards a policy protects you from.

Here’s a quick overview of the basic options and the types of hazards they cover:

Policy Type Hazards Protected Other Details
HO-1 (Basic Form)
  • Fire/smoke
  • Explosions
  • Lightning
  • Hail/windstorms
  • Theft
  • Vandalism
  • Damage from vehicles
  • Riots and civil commotion
  • Volcanic eruption
As written, these policies typically only cover the structure of your home. You can sometimes add your personal property to them, though. And you typically don’t get personal liability insurance with this option.
HO-2 (Broad Form) Everything listed above plus:

  • Falling objects
  • Weight of ice/snow/sleet
  • Freezing of household systems like AC or heating
  • Sudden and accidental tearing or cracking of pipes and other systems
  • Accidental discharge or overflow of water or steam
  • Sudden and accidental damage from electrical current
These policies typically include coverage for your belongings and may also include some personal liability coverage.
HO-3 (Special Form) All hazards listed above, plus any other hazards not specifically excluded in the policy. Exclusions typically include floods and earthquakes, but you should check your specific policy for details. These policies typically cover your home and other attached structures and your belongings. They typically also include some personal liability coverage.
HO-4 (Tenant’s Form) Typically covers same hazards as HO-2 policies This policy is specifically for renters. It doesn’t cover the buildings you live in but does cover your belongings. You can sometimes also add personal liability insurance to your HO-4 policy.
HO-5 (Comprehensive Form) This type of insurance is similar to an HO-3 policy in that it protects against every peril except those specifically listed as excluded. It usually gives you more protection for your belongings and a higher personal liability insurance coverage. You need to look at your policy’s specifics, of course. But HO-5 policies often exclude the following:

  • Earth movement
  • Flood
  • Water damage
  • Damage from infestation of birds or other vermin
  • Settling, shrinking, or bulging of the home’s foundation
  • Pets and other animals
  • Mold, fungus, and rot
  • Intentional loss
  • War, government action, and nuclear hazard
  • Ordinance or law
  • Smog, rust, or corrosion
HO-6 (Condo Form) This insurance is specifically for condominium owners. It’s similar to a renter’s policy in that it offers protection for belongings and personal liability. However, condo insurance also protects the parts of the condo for which you are responsible, typically the walls, floors, and ceiling. The covered hazards for this policy are typically similar to those of an HO-3. Look for specifically excluded incidents.
HO-7 (Mobile Home Form) This type of insurance is similar to an HO-3 but is written specifically for mobile and manufactured homes. Again, look at your specific policy to understand what hazards are excluded from your coverage.
HO-8 (Older Home Form) Again, the hazards covered for this type of insurance are similar to those covered under an HO-3 policy. But these are made specifically for older homes. You don’t need this type of policy just based on the date your home was built. But most historic homes and registered landmarks carry this type of insurance.

The important thing to note about all these types of homeowners insurance is that they vary from policy to policy. Most HO-2 policies will cover the same hazards. Most HO-3 policies will exclude the same hazards. But your policy may have slight differences.

This is why it’s so important to ask your insurance company about the specifics of your policy. And you should also understand under what circumstances an event is covered.

For instance, if you lose power and your pipes freeze and burst, the related water damage may be covered. But if you take on water damage because of a neglected issue you knew about for a while, that may not be covered.

Again, this is why you need to be sure that you talk with your insurance agent about the details of your policy. And, of course, practice proper home maintenance to avoid long-term, avoidable damage.

What About Floods and Earthquakes?

You may notice that even the most comprehensive types of homeowners insurance coverage specifically exclude natural events like floods and earthquakes. That’s because these cataclysmic disasters often cause a lot of loss in a short amount of time. Insurance companies have trouble absorbing these losses.

Flood Insurance

Because of this, the federal government has a flood insurance program that offers insurance against this specific event. You can buy this insurance through the National Flood Insurance Program.

The program sells you federally-backed insurance policies through local insurance providers. You must buy the insurance from an agent who works with the program.

Flooding is very common, and it affects many uninsured homeowners each year. To find out if you need flood insurance, put your address into this interactive map. It will show you the level of flood risk at your address. If you have a moderate to high risk of flooding, you should definitely consider adding flood insurance to your homeowners coverage.

Earthquake Insurance

Earthquake insurance isn’t backed by the federal government. But if you live in California, you can buy it through the California Earthquake Authority. Some insurance companies, especially those in earthquake-prone areas, will let you add earthquake coverage to your general homeowners insurance policy.

Earthquake policies can be relatively affordable up front. But if you have to make a claim, they can be expensive. These policies typically charge between 10 and 20 percent of your dwelling coverage limit when they pay out a claim. So if you have $100,000 of coverage, between $10,000 and $20,000 would be deducted from your settlement.

One final type of homeowners insurance you might consider adding to your policy is sewer backup and flooding insurance. Typical homeowners policies won’t pay for sewer-related plumbing, and this can be a big deal if you live in an area with an old sewer system. You can ask your insurer about adding sewer coverage to your typical homeowners insurance policy for an additional premium.

What About the Amount of Protection Provided?

The covered hazards are just one major component of homeowners insurance policies. The other major component is the amount of protection your homeowners insurance policy provides.

Typical policies will include a payout limit for your actual home and its structure, as well as a payout limit for your personal property. If you have a personal liability policy, that policy’s limit will be stated separately, as well.

But knowing the dollar amount isn’t enough. You also need to understand how the insurance company will value your home in the case of a loss. There are three common ways the insurer will do this, lined out below.

Actual Cash Value

With this type of policy, your limit is based on the market value of your home, usually figured based on what you paid for the home. It’s the same for your personal property. In other words, the limit is the initial cost to purchase a property or item minus depreciation for the number of years you’ve had it.

In the case of your home, the actual cash value is not likely enough to rebuild your home in the event of a total loss. This is why most insurance policies operate off of the second option, replacement cost.

However, it’s not at all uncommon for personal property insurance to cover your property up to the actual cash value. So if you bought a brand new leather couch for $5,000 ten years ago and it’s damaged in a fire, you won’t get a full $5,000 for it. You might get $1,000 or even less, depending on how the insurance company calculates depreciation.

Replacement Cost Coverage

The replacement cost of your home is the amount of money it would take to build the same home in today’s market. So maybe you paid $150,000 for your home. But if it burns to the ground and labor and materials are now more expensive, it might cost $175,000 to rebuild.

This is the type of homeowners coverage you should look for. If your home is a total loss due to a covered event, you’ll be able to rebuild with similar space, features, finishes, and fixtures. Keep in mind when calculating the amount of coverage you need that you don’t need to count the value of your lot in replacement costs. When you buy your home, you also buy the land it sits on. And you won’t have to replace that even in the case of a total loss.

Guaranteed/Extended Replacement Cost

This is a common option for homes with special features or historic homes. Because of their specialty features, such as hand-hewn flooring or detailed woodworking, they can be very expensive to replace. In fact, they may cost much more to replace than their actual market value.

An extended replacement cost policy can also be a good idea if you’re in a disaster-prone analysis. When lots of homes are damaged at once, the cost of materials and labor can skyrocket. That means replacing your home can either take a lot longer or cost a lot more. So adding an additional 20 to 25 percent to your replacement costs can be helpful.

Which Should You Choose?

Most insurance agents will recommend at least replacement cost, if not extended replacement cost. This will protect you against most eventualities if a covered event happens to your home.

However, keep in mind that many policies operate differently for your home’s structure versus your personal property. For instance, you’re likely to wind up with a replacement cost policy for your home but an actual cash value policy for your personal property.

This can keep your insurance coverage more affordable. But it also means you may not be able to afford to replace all of your things if your home is a total loss. So keep that in mind, and ask the insurance company about the potential costs of upgrading to replacement cost coverage for your personal property.

Homeowners insurance is complicated, to say the least. But once you get the basics–policy type, additional coverage, and coverage amounts–down, you’re on your way to getting the right policy for your needs.

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The best life insurance is term. And Haven Life Insurance claims to provide term life insurance with less fuss and cost than other companies. We put these claims to the test in our Haven Life Insurance review.

Haven Life Insurance Review

Haven Life Insurance is a 100% online, tech focused life insurance company. It provides fully medically underwritten term life insurance in as little as minutes on many policies.

The company is a relative newcomer to the life insurance field. It’s fully owned by one of the largest companies in the life insurance industry.

We spent time putting Haven Life to the test. We wanted to know whether its website is easy to use. And of course, we wondered if its premiums on life insurance were competitive.

In short, Haven Life is an excellent choice for anyone who wants to get hassle-free coverage in the shortest amount of time possible.

About Haven Life Insurance

New York City based Haven Life Insurance was founded in March, 2013. But don’t let the company’s recent founding scare you away. Haven Life is a wholly owned subsidiary of Massachusetts Mutual Life Insurance Company (“Mass Mutual”).

Mass Mutual is one the largest and best established insurance companies in the United States. The company was founded in 1851 and has over $560 billion in life insurance in force.

Third Party Ratings of Mass Mutual and Haven Life Insurance

Mass Mutual has a rating of A++ (Superior) from insurance industry ratings provider A.M. Best.

Haven Life Insurance has a Better Business Bureau rating of A+ (on a scale of A+ to F). The company has been BBB accredited since July, 2016.

Haven Life also has a Trustpilot rating of five stars out of five (Excellent), based on 284 reviews.

How Haven Life Insurance Works

Haven Life Insurance offers only term life insurance. It doesn’t offer any of the various flavors of permanent insurance, such as whole life, variable life or universal life. Their policies are available in all 50 states, plus the District of Columbia.

Unlike many traditional insurance companies, Haven Life uses a fully automated, 100% online underwriting process. They refer to this as their algorithmic underwriting process. It uses the information you provide on your application, as well as external data, such as:

  • MIB
  • Underwriting information exchange among member insurance companies
  • Pharmacy benefit managers
  • Consumer reporting agencies
  • Other publicly available sources

Haven Life uses sophisticated technology to analyze the data, inform you if you are qualified for coverage, or if additional medical information is needed. The entire process takes place in a matter of minutes.

Eligible applicants: In order to be eligible to apply with Haven Life Insurance, you must meet the following criteria:

  • Be a U.S. citizen and resident
  • Between the ages of 18 and 64
  • Not active military or in the process of enlisting
  • Have no intention to use the policy for business purposes
  • Not planning to use the policy to replace another policy

Policy limits: Policies are available for a minimum of $100,000, up to $2 million for applicants under 60, or no more than $1 million for applicants between the ages of 60 and 64.

Policy terms: Policies feature terms of 10 years, 15 years, 20 years and 30 years.

Premium payments: Haven Life Insurance offers only one payment method, and that’s a monthly draft through a pre-authorized checking account (PAC). The draft takes place on the “monthinversary” of your policy effective date. There is currently no capability to make annual, semi-annual, or quarterly payments.

Payments include a 31-day grace period. Within that time, you can make the premium payment with no lapse in coverage, nor any interest charged on the late payment.

Customer service: Available by phone and live chat, Monday through Friday, 9:00 AM to 6:00 PM, Eastern Time. If assistance is needed after business hours, customer service is available by email.

Haven Life Insurance Policy Features

All life insurance companies have certain provisions, in addition to the basic death benefit. Haven Life Insurance has the following provisions:

Level Premium: Your monthly premium payment will remain fixed throughout the length of the policy term. If your payment is $30 per month, and you have a 20-year term policy, the premium will not change for 20 years.

Accelerated Death Benefit: This provision provides you with access to a portion of your policies death benefit should you become terminally ill. This is defined as an illness with a diagnosis ranging from 12 to 24 months to live. It allows you to collect a significant portion of the death benefit while you are still living. The proceeds are mainly to cover medical expenses, but can be used for just about any purpose. The amount advanced against the death benefit accrues interest, and reduces the final death benefit.

Waiver of premium: In the event you become fully disabled due to either illness or injury, you will not have to make premium payments during the full duration of the disability. If the disability lasts longer than six months, you will be entitled to a full refund of premiums paid since the date of disability (since it often takes several months to establish a disability determination). This provision is available only on applicants under age 50, and does require an additional monthly fee.

Period of Contestability: All policies include this provision, and it’s fairly common in the insurance industry. For the first two years the policy is in force, the insurance company has the option to not pay the death benefit if death is the result of suicide. The company also has the right to contest payment of the death benefit due to other factors, such as information not disclosed on the application. This means that if you die within two years of the effective date of the policy, the company has the right to review the claim, to determine if payment will be made.

Free Look Period: In some states, you may have at least 10 days from when the policy is presented to decide if you want to accept it. This gives you an opportunity to read the insurance contract, and decide if you want to accept it. Should you decide to cancel for any reason, you can get a complete refund of your premium paid within 7 to 10 business days.

Haven Life Insurance Quotes

Obtaining life insurance quotes is one of the big advantages that Haven Life Insurance provides. In my experience, most life insurance companies require you to provide uncomfortable amounts of information, only after which you will be contacted by an agent. It’s a jumping-through-fiery-hoops process, usually followed by repeated solicitations.

With Haven Life, there’s none of that circus. You answer a few questions–without even disclosing any personal contact information–and you get quotes instantaneously. It couldn’t be easier.

The series of six questions is as follows:

  • I identify as: male/female
  • I was born on: enter birthdate
  • I use nicotine containing products: yes/no
  • I consider my health: average/good/excellent
  • I’m looking for a coverage amount of: increments from $100,000 up to $2 million
  • With a policy length of: 10/15/20/30 years

Once completed, you hit the “Calculate” button beneath, and your quotes appear immediately.

I entered information for a 40 year-old male, non-smoker, in excellent health, for a $500,000 20 year term policy, and got the following results:

I then entered information for a 40 year-old female, non-smoker, in excellent health, for a $500,000 20 year term policy, and got the following results:

Now notice that even though I entered both profiles as being in excellent health, the quotes provided showed monthly premium rates for all three health classes–excellent, good and average.

This isn’t just a mere convenience. One of the issues in applying for life insurance is that health level is highly subjective. It’s not unusual for applicants to state their health is excellent, then the insurance company–based on a search of your medical records–comes back with a rating of “good” or “average”. The advantage with a quote from Haven Life is that you will already know the premium range of the lower health classifications.

It’s important to remember that the quote you receive is just the starting point. You must still make application, and in many cases it will take a few weeks to get from the quote to policy issuance.

Haven Life Insurance Application Process

Like the life insurance quote, the application process takes place completely online. Naturally, the process is more involved and will take more time, though there is a fast-track process that can bring an approval immediately. We’ll get into that shortly.

To get started, you’ll need the following information:

  • Driver’s license number and expiration date
  • Social Security Number
  • Current height and weight
  • Personal and family medical history
  • Your financial information, including salary and existing debt
  • Lifestyle and health history information
  • Ages of your dependents and intention to cover future college education costs
  • Your spouse’s age and income
  • Contact information for your primary care physician

InstantTerm. This is the fast-track approval. It provides an immediate decision on your eligibility for coverage, that way you can get coverage upon signing your documents and making your initial premium payment.

It works this way:

Option One: If you qualify for InstantTerm, you will not be required to take a medical exam. This will be possible for qualified, healthy applicants, up to age 45, applying for no more than $1 million in coverage. This will require that you are absolutely truthful in completing the insurance application, and that information is verified as accurate by third-party sources.

Option Two: If it’s determined that you do need to take a medical exam, the final approval process will take longer. Once the exam has been completed, and labs have been processed–which will generally take between seven and 10 days–the final approval can be issued. This can extend the final approval by an additional 2 to 4 weeks, depending upon how quickly the medical exam is scheduled and all results are in. This will generally happen if underwriting has concerns, either with the information in your application, or from third-party sources.

The medical exam involves a paramedic coming to your home or office. It will be scheduled at a date, time and location that works best for you. The exam will typically require that you provide blood in urine samples, and that other tests be performed as deemed necessary by underwriting.

Haven Life Insurance Pros and Cons

Pros:

  • Quick and easy life insurance quotes. You answer a few questions online, and get a quote back instantly. Most insurance companies collect your information, then have an agent contact you, making for a more complicated process just to get a quote.
  • If you qualify for InstantTerm, final approval can be had within minutes of application, rather than the four-to-six weeks it takes for traditional life insurance underwriting approval.
  • The quote you receive provides premium rates for all three health classifications, excellent, good an average. There’s less of a surprise if the final approval comes back with a lower rating.
  • You can get the benefit of a fully medically underwritten premium rate, even though a medical exam isn’t required.

Cons:

  • Haven Life does not offer the ability to replace an existing life insurance policy.
  • A noncitizen, or nonresident of the US is not eligible for coverage.
  • You can purchase a policy for yourself and either your partner or spouse. But policies are not available for other members of your family, including your children.
  • Term coverage only, no permanent options are offered.
  • There is no provision for a Haven Life term policy to be converted to permanent life insurance.
  • No coverage available for applicants over 64.

Should You Get Life Insurance from Haven Life Insurance?

Haven Life Insurance is an excellent choice if you want a hassle-free term life insurance policy in the shortest time possible. And if you’re young, in excellent health, and not a fan of medical exams, you can take advantage of Haven Life’s InstantTerm approval.

That’s no small advantage. A lot of people really don’t like undergoing medical exams. With other life insurance companies, a no-medical exam policy will result in a higher premium, and offer a much smaller policy. With Haven Life’s InstantTerm, you can get the same premium as you would on a policy with a medical exam, but without the exam.

There are some disadvantages to Haven Life Insurance, as described in the “Cons” above. And any time you’re shopping for life insurance, you should always get quotes from several companies. This is even more important if you do have less than perfect health.

But other than those caveats, Haven Life Insurance should be on your short list of carriers if you’re in the market for a policy.

If you’d like more information, or you’d like to apply for coverage, visit the Haven Life Insurance website.

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There can be a lot to consider when shopping for life insurance. Cost and ease of application might sway your initial decision but does that make it the best choice?

best term life insurance companies

When it comes to life insurance, things seem so complicated that you may not feel like shopping around. Maybe you just take the policy your company offers, and call it a day. But here’s the deal. Employer life insurance coverage is not likely enough to cover your family’s actual needs. So you’ll probably need to shop around for additional life insurance coverage of your own.

And that brings us to today’s topic. What are the best life insurance companies? Before answering that question, let’s first look at factors you should consider when making your choice.

Key Factors in Picking the a Life Insurance Company

Again, though, it can be easy to just take the most obvious option. Just sign up for insurance with the first company that pops up in an online search. But here’s why that’s not a good idea:

  • Cost. By shopping around, you can ensure that you get the best possible coverage for the lowest possible monthly or annual premium. Even on small policies, costs can vary dramatically from one insurer to the next.
  • Ease of application. Some companies still have laborious applications processes. You may want, for personal reasons, to skip the medical exam. Or you may want to submit 90% of your paperwork online. Either way, going with one of the best term life insurance companies will help you get through the application process easier and more quickly.
  • Customer service. You may never need to call your life insurance company’s customer service line in your life. But if you pass away and your family needs to cash in the policy, will it be easy for them to do so? Checking out a company’s ratings and reviews can give you visibility into this important issue.
  • Financial rating. Even though all life insurance companies seem like large entities that aren’t going anywhere, that’s not necessarily the case. You want to buy a policy with a company whose financial rating virtually guarantees they’ll be able to pay out your claim when needed. As we’ll discuss below, A.M. Best is the company that rates life insurance companies.
  • Flexible options. If you just need a standard 20-year or 30-year term life insurance policy, this may not be important to you. But maybe you’re interested in additional riders, a very large or very small policy, or special terms like decreasing or increasing coverage. In this case, you’ll need to work with a company that lets you get outside the term life insurance box a bit.

With all that in mind, we’ve rated the best term life insurance companies. This will help you narrow down your list when you’re shopping for a policy. That way, you can cut down your shopping time while ensuring that you get the life insurance policy you need.

Our Picks for the Best Life Insurance Companies

So without further ado, here are the term life insurance companies we think best fit the criteria above.

Northwestern Mutual

Northwestern Mutual makes the cut because of its incredibly high financial rating and consistently good customer service ratings. A.M. Best gives it an A++ financial rating. And consumers consistently rate it well for customer service. What that means for you is that in the event of your death, your beneficiaries should be able to quickly and easily file your life insurance claim.

Northwestern’s customer service is good in part because it’s not completely automated. This, though, can make the application process a bit hairier. For instance, you can’t get a quote online or apply online.

However, this does mean that you won’t get an incorrect ballpark quote. The price you get when you apply with an agent in person or on the phone is what you’ll pay if you qualify.

Northwestern offers a good variety of policy types, including different term lengths. It also offers annually-renewable policies. If it turns out that you eventually need permanent life insurance, Northwestern is a good option. Its term policies are convertible to permanent life insurance.

State Farm Life Insurance

State Farm has a great customer satisfaction rating and a strong financial rating. But what really sets it apart is it robust online quote and application process. This tool walks you through every step of the process, including deciding how much coverage you actually need.

One of the strengths of this quote system, too, is that it gives you visibility into State Farm’s different life insurance policies. Once you put your information into the quote tool, you’ll be able to compare different policy lengths and types. You can also look at various riders, including a child life insurance rider or adding a second adult to your policy.

You can apply online after you get through the quote process and choose the life insurance product you want to purchase. You’ll still need to talk to an agent after your application goes through, but it does make the beginning part of the process simple.

MassMutual

This company actually operates a couple of subsidiaries, including Haven Life and ValoraLife. These two entities are set up specifically to move the life insurance application process online. Haven Life has consistently gotten excellent ratings since its launch, and it offers a user-friendly quote and application tool. Both Haven Life and ValoraLife offer medically underwritten life insurance, which can make your insurance cheaper if you’re in good health.

MassMutual also offers strong policies under its own name. You can get quotes directly from MassMutual online, as well, and then apply online.

MassMutual and its subsidiary companies offer a wide variety of term life insurance products. Between them, you can likely find the one that best fits your needs. Plus, they are rated A++ by A.M. Best and have high customer service ratings.

MassMutual sells life insurance online via HavenLife. One benefit is that many can qualify for life insurance without a medical exam.

Mutual of Omaha

This company underwrites policies by United of Omaha Life Insurance company. The company has an A+ financial rating from A.M Best. And they have generally good customer service ratings online.

One of the good things about Mutual of Omaha is that you can get a relatively small policy. Theirs start at $25,000. You can also get 10, 15,20, and 30 year terms. When you want a smaller policy–under $100,000–you can apply online. But if you need a bigger policy, you’ll need to connect with an agent by phone.

Mutual of Omaha has a nice online quote tool. And you can apply online, again, if you’re purchasing one of the smaller policies.

Which Should You Choose?

If you’re shopping around for a new term life insurance policy, I’d recommend getting quotes from at least two or three of the companies listed here. As long as you get a good price on a term policy that works for you, you really can’t go wrong with these companies.

With that said, if you want to be able to complete almost all the paperwork online, Haven Life through MassMutual is probably the place to start. They tend to have lower premiums than the other companies, and put most of the quote and application process online.

On the other hand, if you want to work with a longstanding company with excellent customer service ratings, consider State Farm. There’s a reason they’ve been rated highly for many years!

Really, though, you should be shopping around with at least a handful of life insurance companies before settling on the one that offers the policy you want to purchase.

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Universal life insurance has both advantages and disadvantages. We cover both the pros and cons to help you decide whether universal life is best for you.

universal life insurance pros and cons

Every once in awhile, I will receive financial questions from readers. Now, I am not a financial adviser. I usually suggest those needing significant assistance with their financial decisions to seek the advice of a professional. However, I don’t mind answering general questions that might be helpful for a wider audience. I also solicit help from the site’s other writers who may have more knowledge than I on a particular subject.

Today’s question focuses on a topic that I don’t usually cover: life insurance. Specifically, they wanted to talk about universal life insurance, which is a bit of a controversial topic in personal finance circles.

Here’s the question a reader sent in:

I recently read a book called Tax-Free Retirement by Patrick Kelly. In it, the author was selling the idea of buying Universal Life Insurance as a way to build your retirement fund. I’ve been doing research on Universal Life Insurance (pros and cons). What are your thoughts on Universal Life Insurance, and is it something you recommend people buy?

What is Life Insurance?

Let’s take a moment to talk about the many aspects of life insurance in general. Then, I will circle back to address the specific question about universal policies and retirement funds.

So, there are three primary parties when it comes to insurance: the insured, the beneficiaries, and the insurer. Life insurance policies are offered by the insurer to protect the income and earning potential of the insured.

If the insured passes away, the beneficiaries — who relied on the income of the insured to some degree — can continue with a comparable quality of life. This may be in the form of receiving regular income (through a trust) or even getting a lump sum payment.

For example, the head of a household (or all income earners in a family) may buy life insurance in order to protect the needs of their children. This coverage could ensure that the children have their everyday needs met, as well as provide for future education expenses, healthcare, and the like.

Life insurance benefits could also help pay for funeral costs, medical bills, and any outstanding debts (such as a mortgage or joint credit card debts) that the insured may leave behind.

Types of Life Insurance

Term Life Insurance

Life insurance comes in several flavors. The most common, and the most basic, is term life insurance.

This is a typical insurance policy, where coverage is based on a set number of years. During that period, the insured will pay premiums and be protected. However, at the end of the term, the protection ends.

While term life insurance gives you the most bang for your buck, the nature of it means that someone could essentially pay into a policy for several decades without a return. If that insured individual continues to live and stay healthy, he or she will never receive any benefit from their term policy, other than peace of mind.

At the end of a policy term, insurers typically offer an option to renew the policy. However, depending on your age and any health changes, your premiums are likely to go up with renewal. This is why term life insurance is more ideal for younger, healthier adults, when their risk of death is lower.

Related: How Much Life Insurance Do You Need?

Of course, the idea of paying into a policy for years without receiving any benefit didn’t sit well with many. So, insurers eventually came up with different types of policies.

Permanent Life Insurance

These alternatives are often called permanent life insurance policies, and there are several different plans designed to suit a customer’s needs. Universal life insurance is one form of permanent life insurance. Whole life insurance is another.

These non-term policies usually include a savings or investment component in order to help insurers mitigate some risk. That’s because, in these permanent policy scenarios, the chance of paying out benefits is closer to 100 percent. This component can make them a very tempting choice when shopping for life insurance, but let’s take a deeper look before you make any decisions.

What Is Universal Life Insurance?

Universal life insurance is a type of permanent policy that can provide coverage for the remainder of your life. You won’t have to worry about renewing the policy every five, 10, or 20 years, as with term insurance. However, if you want to cancel at any time, you’ll actually have the opportunity to cash out on some of the money that you paid into the policy.

These policies often cost considerably more than term policies of the same coverage amount, but provide some flexibility in the premium payments over time.

Premiums, in case you don’t know, are the amount of money that the insured pays to the insurer for the coverage, usually on a monthly basis. The unique thing about permanent life coverage, though, is that a portion of these monthly payments also goes toward funding each policy’s savings component.

The savings component is the cash value portion of the insurance policy. It’s basically a savings account from which the insured can withdraw or borrow money over time. They can even use it to reduce or skip their policy premiums when needed. The younger and healthier you are, the more money is placed in this account; as you age or as your health deteriorates, a smaller percentage of your monthly premium will go toward building this cash value.

Because of this benefit, the premiums are much higher. Sometimes, the difference in premium is a factor of ten. So, is the savings portion worth ten times more than a basic insurance policy on its own?

The Pros of Universal Policies

There are a number of reasons that universal life insurance policies are so appealing.

First off is that whole savings component. At its foundation, it’s much more ideal to buy life insurance that actually holds some value. If you decide you don’t want the policy 15 years from now, you’ll simply* be able to cash out.

*I say simply, but the ease of this policy cancellation varies. We’ll discuss this in the cons section, next.

You also have a potential nest egg built up after all of those years, which could be seen as a forced retirement savings vehicle (if you’re the type of person who needs that sort of thing).

You’ve been paying premiums and your money has been earning interest for years. If you live to a ripe old age, you have a nice chunk of change saved up, which you can either leave alone or borrow from when needed. If you don’t, your beneficiaries receive their payout, without you having to worry about renewing term policies over the years.

Another interesting benefit of universal life insurance is that the insured can use interest earned on the savings component to help pay the monthly premiums. If you get in a financial bind or want to allocate your money elsewhere for a few months, you usually can (depending on the cash value and interest earned on your policy).

One of the biggest perks of a permanent policy, though, is simply avoiding the issue of renewing term policies or shopping around for rates every few years. You can stick with one policy throughout the decades, and have one less thing to worry about. This is particularly great if you already know that you’ll need lifelong coverage in order to provide for a dependent, such as if you have a special needs child or a disabled spouse.

There are quite a few downsides, though.

The Cons of Universal Life Insurance

High Fees

While the savings component of a universal policy sounds great in theory, it may not be so wonderful.

Compared to the returns earned by your universal policy premiums, you may be shortchanging yourself. You may easily be able to generate your own returns in savings or investments that are significantly better than the returns you’d receive through your policy. You’ll also have much more flexibility with your own investments and can make your own decisions. You don’t have any say where your policy’s cash value savings are invested.

To further that note, you’ll also likely pay much higher fees for managing the investments of your universal life insurance policy. With other retirement accounts, such as 401Ks, you can find investment fees as low as half a percent or lower. Universal life policies, however, often have fees as high as 3%. This can make a significant difference in the overall growth of the savings.

Cancellation Fees

Another downside is that when you withdraw or borrow money from a universal life insurance policy,  it reduces the amount that your beneficiaries would receive if you died before repaying the loan. This alone is often enough to steer people away from this type of coverage.

If you buy into a policy and then change your mind later, you can cancel. However, cancellation isn’t easy, and can wind up costing you a pretty penny depending on how long you’ve held the policy. Be sure to read the fine print to see how much of your cash value you will forfeit if you cancel the policy in the first 3 years, 5 years, 10 years, and so on.

Mediocre Returns

Now, to what I consider to be the biggest downside of them all. Remember how we talked about universal policies being for life, versus a shorter “term” length? Well, there’s a very important caveat that could land you in some serious hot water, if you’re not careful.

Yes, universal life insurance policies can last you the rest of your life. However, this depends on the returns of those invested savings and the actual cost of your death benefits, according to your health changes over time.

As mentioned, a portion of your premiums each month goes toward your actual “life insurance coverage.” Let’s say that you’re a 25 year-old in great health paying $100 a month. Twenty dollars of that might be going toward the insurance company’s actual cost for providing life insurance for you. The remaining $80 is going into your cash value savings.

However, as you age, that number will change. When you turn 60, that split might be closer to $70 for benefits and $30 going into savings. When you hit 75, you may be in deteriorating health and those investments might not have panned out as well as the insurance company had hoped; in turn, the company may require more than $100 a month for your coverage, even though that’s your premium amount.

To make up for the deficit, the insurance company can (and will) dip into those cash value savings. If it goes unnoticed, you could realistically check on your account one day — you know, the one you counted on to be your big nest egg and provide life insurance benefits for your family upon your death — only to find it dwindled away to nothing. Decades of savings and “guaranteed” benefits, gone.

Unnecessary for Most

One final note. Most individuals do not need permanent life insurance. A retiree who has little or no earned income, for example, often has no need of life insurance. One exception, however, are families caring for disabled adult children. But again, for most families, life insurance is unnecessary after the kids have left home and retirement is at hand.

Should a Universal Life Policy Build Your Retirement Fund?

This is a tricky decision and has a lot of drawbacks. But the savings component can still make this a tempting option for many.

There are three major drawbacks to this approach that you should keep in mind before buying into a policy. Because of these reasons, I would not use a life insurance policy of any type to increase my planned income during retirement.

  1. Any retirement income you need and withdraw reduces the value of the benefits your heirs will receive, as mentioned above.
  2. You can get better investment options by opening an IRA at a discount brokerage.
  3. You’ll be paying much more for less potential performance than other retirement options. Even a 401(k) could cost much less.

If you’re a savvy saver and investor, you may want to leave your investments separate from your life insurance policy and opt for term life insurance. If you appreciate consolidating your savings with your insurance policy and are not concerned with a significantly higher cost, it might make sense to opt for this type of coverage.

For readers: Do you have a universal life insurance policy and are you happy with the insurer so far? Have you had any experiences collecting benefits from a policy?

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