Is Universal Life Insurance Right for You? Here’s What to Consider

I’ve been a licensed insurance agent in the State of Washington for nine years, helping people understand the value of universal life insurance as a vehicle for future income. While it’s not right for everyone, those who are in good health, have maxed out other retirement options, and are looking for additional tax-advantaged strategies can benefit from this little-known tax code.

Loans
It’s important to understand that terms like withdrawal or distribution come with taxable implications. However, when you take a loan against the cash value of a policy, you create an agreement that is recognized as tax-free under IRS Section 7702. The loan amount and term are determined based on the current cash value of the policy. The loan will be subject to interest, which is set by the policy provider. Depending on the policy and crediting strategy, you may be able to offset that interest with gains.

Pros and Cons
You can use these loans however you choose! For example, if you want to pay for a child’s college education for four years, you can take loans during that time and then stop. If you want lifetime income, you can request a hypothetical projection on when to withdraw income and tailor that to your retirement plan or a self-driven sabbatical. When structured properly, each of these strategies remains tax-free. Misunderstanding the product or failing to work closely with your agent to align the policy with your financial goals can lead to issues down the road.

Modified Endowment Contract (MEC) Considerations
Everyone should be aware of the risk of unintentionally converting their policy into a Modified Endowment Contract (MEC), which eliminates key tax benefits. When setting up a life insurance policy, the amount of coverage is based on a premium schedule—how much you plan to pay and for how long. If the cash value exceeds the limit applied for insurance coverage, the policy becomes a MEC, causing you to lose those tax advantages.

While avoiding MEC status is crucial, other factors like your crediting method and additional policy riders could also limit your growth potential. Comparing multiple providers allows you to find the best product for your needs.

Working with the Right Agent
When shopping for life insurance, consider working with an independent agent. Unlike agents affiliated with a single company, independent agents can compare multiple providers to find the best quotes that match your needs and health profile. Agents tied to larger companies often experience high turnover, meaning you may not continue working with the person who originally set up your plan.

An agent should always disclose their commission for each product. This transparency helps you determine whether they are recommending a policy based on your best interests or their financial gain. As a fiduciary, I believe this is the best way to build trust and confidence with my clients and prospects.

Disclosure:
KJ Dykema of Family Retirement LLC is licensed to sell insurance only in Washington. For clients in other states, like Texas or California, we refer to licensed professionals. You are not required to follow our recommendations or use our services and may choose any provider.

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