Buying a universal life insurance policy might make sense for you when it comes to choosing a type of life insurance coverage. However, using this type of vehicle as an investment is generally a bad idea. Many people put money into this type of life insurance as a way to save money on taxes and accumulate a cash value. The problem is that the drawbacks of this type of investment generally outweigh the positive aspects that come with it. Here are a few reasons that a universal life insurance policy is a bad investment.
One of the biggest drawbacks of putting money into a universal life insurance policy is that you will have to pay several fees. Once you make a payment to the insurance company they will take a certain percentage of the amount of money that you give them. Every month, they will have administration fees and they will take money for the mortality benefit. While this may not seem like a lot of money, it can add up significantly. This will limit the amount of potential that you have when investing in universal life insurance.
2. Lack of Options
Many proponents of universal life insurance point to the fact that you can choose investments to put your cash value into. While this is technically true, the types of investments that you have to choose from are very limited. You will generally have a few different types of mutual funds that you can choose from. If you were to invest that same amount of money into a traditional brokerage account, you would have limitless options to choose from between stocks, bonds, mutual funds, and more. The returns that you can generate from the investment choices that they give you are often very small and these investments lack potential.
3. Partial Access
Another disadvantage of using universal life insurance as an investment is that you will only be able to gain partial access to the money that you accumulate. Many people build up a cash value in their universal life insurance policy and then take out a policy loan against that cash value. While this is a good theory, you cannot gain full access to the money that you have saved. You will generally only be able to take out a portion of the cash value in the form of a policy loan. Since you have only gained limited returns on your investments in the first place, when you can only take out a portion of the money, this significantly lowers the effective return. This is basically like putting money in a savings account that does not earn interest. Then when you borrow the money, you have to pay it back with interest in most cases.
Your other option to get your hands on the money is to cash out the policy. If you do this, you will also have to pay surrender fees that will significantly cut into the amount of money that you get.