Universal life insurance offers the best of both worlds to many insurance shoppers, combining the flexibility of term life insurance and the stability and growth of permanent policies.
With lower premiums than whole life insurance and a range of investment options, universal policies are a popular choice for individuals with permanent coverage needs.
Below, we’ll walk through the basics of universal life insurance so you can determine if it’s the right type of coverage for you.
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Universal life insurance takes the basic premise of term life insurance a few steps further, adding permanence and an investment element to the policy.
It comes with four simple components:
- Face amount
- Cash value
- Maturity date
The premiums you pay regularly for coverage fund not only the death benefit of the policy, but also the cash value, an additional savings account.
The cash value can accumulate interest over time and can be accessed for loans during the life of the policy.
Coverage lasts through the maturity date you choose, which can be an age you choose, like 100.
We’ll take a closer look at how universal life insurance works below.
Universal life insurance is praised as the most flexible kind of permanent coverage, letting the policyholder sometimes adjust the face amount of the policy and premiums over his or her lifetime.
As you age and your financial obligations decrease, you can lower the face amount of the policy to match your situation.
With universal coverage, the provider sets a basic cost of insurance, the minimum amount you must pay to keep the policy in force.
Whatever you pay above and beyond that amount will fund the cash value savings account.
When you pass away, your beneficiaries will only receive the policy’s death benefit, even if there are funds in the cash value.
You can use the policy’s cash value to:
- Pay premiums: Premiums on universal policies are subject to increases. You can cover the difference or potentially pay all your future premiums using the cash value.
- Borrow money: You can borrow from the cash value, but any unpaid loans at the time of death will be taken from the benefit your beneficiaries receive.
- Surrender: If you can’t bear the weight of premiums or simply no longer need coverage, you can surrender your policy and still walk away with the cash value savings.
If you outlive the policy’s maturity date, you’ll be given a sum of money, usually equal to what’s remaining in your cash value account.
There are essentially three types of universal life insurance:
The type of universal policy you choose determines how the cash value portion of the policy grows.
Here’s a closer look at how each policy option is structured:
Indexed Universal Life Insurance
With an indexed universal policy, the policy’s growth is determined by one or more stock market indexes like the S&P 500.
When the market thrives, so does the cash value portion of your life insurance policy. Conversely, when the market suffers low returns, so do your savings.
However, some IUL policies help you limit this downside; the trade-off, of course, is they can limit the upside, too.
Some IUL policies allow you to combine index-based growth with a minimum guaranteed growth rate.
Your premiums are subject to change with this type of policy, and the company can set limits on how much you can gain.
Guaranteed Universal Life Insurance
If index-based investing is too risky for your preferences, then a guaranteed UL policy might be a better fit.
This option provides you with a standard guaranteed interest rate that stays the same no matter how the market fluctuates.
Guaranteed policies can also lock in your premiums, so you can rest assured your policy will not lapse as long as you make your payments.
Guaranteed policies tend to be less profitable than some of their riskier alternatives, best for individuals who are more concerned with securing affordable permanent protection than investing.
Variable Universal Life Insurance
Variable universal policies are a bit more hands-on than guaranteed policies, yet they’re unique from indexed policies in their investment methods.
Rather than seeing growth tied to an index, you essentially invest your cash value into a mutual fund.
You’ll be provided with a variety of investment options and information on their performance, and you get to decide how your cash value contributions get distributed.
Just note that variable policies come with high management fees, so the returns often aren’t worth the cost.
You will need to purchase the policy from a registered representative, which is a life insurance agent or advisor who has their Series 6 and Series 63 licenses (or, alternatively, a Series 7).
In general, universal life insurance is more expensive than term life insurance but less expensive than whole life coverage.
The face amount, maturity date, and the type of universal policy you choose can significantly affect the cost of coverage.
Since universal life insurance can be altered over the life of the policy, the cost is subject to change even more.
In addition to the factors above, what you pay for coverage will depend largely on the risk factors below:
- Age: The younger you are, the lower rates you’ll pay for universal life insurance.
- Health: The carrier will assess your overall health and conditions, looking at factors like your BMI, heart health, and blood pressure.
- Family history: Underwriters also look at your immediate family’s health history, specifically for conditions like diabetes, heart disease, and some forms of cancer.
- Job and hobbies: What you do on and off the clock can impact your life insurance rates if your profession or hobbies put you at an increased risk of dying.
- Driving record: A record of reckless driving indicates you’re at a higher risk of dying, so underwriters will look at your history behind the wheel.
What you pay for coverage also depends on what provider you choose.
Some of the best life insurance companies specialize in universal policies, while others might offer less competitive underwriting and rates on these policies.
Both universal and whole life insurance can provide you with permanent protection and cash value, but they differ in other ways.
With whole life insurance, your death benefit and premiums are fixed from day one, with a set amount funding the cash value. Savings also grow at a considerably low fixed interest rate.
On the other hand, universal life insurance allows you to alter the premiums, in some instances, of the policy to match your financial needs as they change throughout life.
With all of its guarantees, whole life insurance is by and large the most expensive form of coverage, followed by guaranteed universal protection.
If you need permanent coverage, you should carefully weigh the cost and unique advantages and drawbacks of both whole and universal policies.
As you set out to buy universal life insurance, keep the following tips in mind to get the right policy at the right price.
1. Define Your Needs
Before you purchase any life insurance policy, it’s important to carefully calculate your family’s coverage needs.
Some common expenses life insurance can match include:
- Income replacement
- Shared debts
- Children’s education
- Business expenses
- Charitable giving
- Estate taxes
- Long-term care
Term life insurance is apt to cover most of the needs above.
However, if you have long-term dependents or want to shield your loved ones from estate taxes, universal coverage could be a fit.
Just be sure that you pick a maturity date that matches your needs so your coverage doesn’t run out while you still need it.
2. Make Adjustments
To maximize the impact of your investing, pay more into your cash value while you’re young.
If you purchase a policy in your 20s or early 30s, you could save a sizable amount of money to cover your premiums later in life or to put towards another venture.
As you near retirement and your expenses hopefully dwindle, reassess your coverage needs and make adjustments to benefit the most from your policy at every age.
3. Pay Back Policy Loans
The accessible cash value is one of the biggest advantages of universal life insurance; just make sure you use it responsibly.
When you take out a cash value loan, it’s as if you’re borrowing from your life insurance carrier, using your policy as collateral.
If you let the interest on unpaid cash value loans pile up, they can threaten your family’s financial future.
Any balance remaining for the loan at the time of your death will come directly from the face amount of the policy, reducing the funds you set aside for your loved ones.
4. Consider Alternative Investments
Truthfully, there are more lucrative investment options than universal policies, such as a 401(k) or Roth IRA.
These options also give you more control, letting you decide where and how to invest your contributions.
The main goal of life insurance is to protect your loved ones from the financial repercussions of your death.
As such, you shouldn’t pick a permanent policy just because of the cash value component.
Instead, consider it as a bonus if you find yourself in need of lifelong coverage.
5. Compare Your Options
The best way to get the policy you need is to compare multiple companies and types of policies.
In a few clicks, you can get quotes for both temporary and permanent options, giving you an idea of the actual cost of universal coverage and its alternatives.
Compare the quotes to your coverage needs to pick the right policy.