What Is Universal Life Insurance?
Universal life insurance is a type of permanent life insurance that allows the policyholder to adjust their premiums and death benefit throughout a policy’s lifetime. Within universal life is traditional, indexed and variable cash value accumulation, and each has its own level of risk.
Key Takeaways
- Universal life insurance is a form of permanent life insurance that allows policyholders to adjust their premiums and death benefit.
- It includes a cash value account that earns a fixed market rate of interest, with traditional universal life policies.
- Other types of universal policies are indexed universal and variable universal, in which the cash value grows based on an equity index or investments the policyholder has chosen themselves.
Universal life is a type of permanent life insurance policy in which the policyholder can alter the premium payments and, as a result, the death benefit. Additionally, traditional UL has a cash value component that earns a fixed money market rate of interest. Once the cash value has accumulated enough, the insured can increase their premium payments and death benefit, though they may have to pass a medical exam.
When the insured pays premiums for a UL policy, part of it goes to the death benefit, and part of it goes to the cash value component. If there’s enough cash value after a certain period of time, the insured can use it to cover their premiums. The cash value, with standard UL policies, is linked to an external index, such as Treasury bills, and has a fixed interest rate, guaranteeing cash value accumulation. However, if the cash value gets too low, such as if you take out too many loans, the policy could lapse and coverage would end.
Like with any life insurance policy, universal life policies have a death benefit that is paid out to beneficiaries when the insured dies. The major difference with UL is that the policyholder can adjust the size of it throughout the lifetime of the policy, if they’re willing to pay more in premiums.
With standard UL, the cash value has a fixed market rate of interest. With other types of UL, namely indexed universal life and variable universal life, the cash value is invested differently.
While the riders available with your UL policy will vary based on the company and the exact policy you choose, here are some common life insurance riders you can expect.
Pros:
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Adjustable premiums/death benefit
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Large potential for cash value accumulation
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Permanent coverage
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Guaranteed tax-free death benefit
Cons:
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Cash value/death benefit could decrease if investments/market performs poorly and there is no floor (IUL/VUL)
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More expensive than term life insurance
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Policy could lapse if cash value is too low
Universal life insurance may be a good fit for you if:
- You want the option to adjust your premiums/death benefit.
- You want cash value that grows based on either a fixed market rate, an equity index or investments that you chose yourself.
- You want permanent life insurance.
- You can afford the premiums, which are higher than the premiums of term life insurance, typically.
However, it may not be the best choice for you if:
- You cannot afford the premiums.
- You want life insurance that lasts for a finite period of time.
- You would like level premiums throughout the lifetime of your policy.
- Research companies: Decide what you’re looking for in a policy in terms of coverage limits, riders and the exact type of UL you prefer. Our list of the best universal life insurance companies is a great place to start.
- Get quotes: Get quotes from multiple companies, seeing how much coverage would cost with the same death benefit.
- Apply: Once you’ve chosen a company, complete the application. You may be able to fill out an application online, or you may need to contact a financial advisor or insurance agent directly.
- Take a medical exam: Complete the underwriting process, which may include a medical exam.
- Customize your policy: If you get approved, choose your beneficiaries, coverage amount, policy type and riders.
- Activate your policy: To make your policy active, sign your contract and pay your first premium.
Whole Life
The major difference between whole life and universal life, which are both permanent policies, is that with whole life policies, your death benefit and premiums are fixed throughout the lifetime of your policy. Additionally, only whole life insurance policies have the potential to earn dividends that the company pays to you. However, with both whole life and traditional UL, the cash value will earn a fixed rate of interest, making these policies lower-risk than IUL or VUL policies.
Term Life
Term life insurance lasts for a specific time period between one and 30 years, and has no cash value component. Expect to pay lower premiums for term life compared to universal life, or any permanent policy. Additionally, term policies typically have level premiums, and you won’t be able to adjust the death benefit, unlike with UL policies.