A useful savings and investing tool, universal life insurance is a common tactic to boost economic security for you and your loved ones. At a first glance, universal life insurance may seem like a flawless choice, but it’s important to assess whether this option is appropriate for your individual circumstances and long-term goals. There are a few caveats to take into serious consideration.

Start your investigation here: we break down the types of universal life insurance and discuss some of the hidden challenges inherent to these types of policies.

Understand the Differences Between Universal Life, Indexed Universal Life, and Variable Universal Life

Universal life insurance is available in three forms: universal life, indexed universal life, and variable universal life.

These policies are similar in a few key aspects:

• They accumulate cash if properly funded and deliver an equally good death benefit.
• A cash value can be accessible through withdrawals or loans but note there is no guaranteed rate of return.
• They’re transparent: expenses are explicitly stated, rather than obscured by a net rate of return.

But what’s even more important to consider is how these policies differ:

• Universal life insurance only provides the option to save at a specified interest rate. This interest rate can change over time.
• Variable universal life insurance provides a fixed account with a specified interest rate, as well as investment options like subaccounts, which are similar to mutual funds.
• Indexed life insurance allows the policyholder to approximate what a stock market index would have returned. It limits your rate of return in prosperous years but does not reduce the cash value when the market declines.

Prepare for Common Obstacles

Universal life insurance policies are accompanied by some complexities, which may present some problems for the policyholder. For one, your rate of return may be lower than what you hoped for. In that case, you can increase your premium contribution to the policy to make up for the lower rate of return.

Additionally, the policy could easily become too pricey for your financial capabilities if you wait too long to increase your contributions. But, on the other hand, if you aren’t meeting the minimum contributions required, the policy cannot remain active.

Consider Your Options

As with any big financial decision, choosing life insurance requires ample research and thought. Life insurance has an impact on our peace of mind, can influence our financial decisions and creates a safety net for loved ones. Take careful consideration in choosing your policy, as universal life insurance might make sense for some circumstances but might not be as appropriate in others. Most of all, it’s crucial to monitor your policy to ensure it continues supporting your overall goals and capabilities.

Discussing your options with a financial planner can bring you some needed clarity.

Bill Kelso, CPA, CFP®, is a financial planner* at Pinnacle Financial Advisors, which assists individuals, families, and businesses with financial planning and wealth management in Sedona and the Verde Valley. He is a Registered Representative offering Securities through UNITED PLANNERS FINANCIAL SERVICES, Member: FINRA, SIPC. *Advisory Services offered through SEROS FINANCIAL, LLC. Pinnacle Financial Advisors, Seros Financial, and United Planners are independent companies.