What is Universal Life Insurance?

There’s no “one size fits all” solution when it comes to life insurance. Some prefer the less expensive and straightforward appeal of term coverage. Others utilize their policies both as lifetime guaranteed protection and see the cash value as an additional way of investing and saving money.

If you think like the latter and see value in having flexibility with both the premiums and death benefit, then Universal Life Insurance is something that you should definitely consider.

What is universal life insurance and how does it work?

Universal life insurance is a type of permanent life insurance that features a flexible premium payment. Whereas Whole Life Insurance comes with a level premium and set death benefit, Universal Life offers changeable premium terms and differs in how its interest rate is credited.

Being a type of permanent life insurance, it provides lifelong protection to the policyholder and features a cash saving component. This means that aside from funding your death benefit, a portion of your premiums goes into the cash value as well..

This cash value can be used when you need to take a loan or utilize it for paying your premiums. The funds in the cash savings follow a tax-deferred setup for growth.

Universal Life Insurance: What You Should Know

• The premiums are adjustable – The main reason why people choose ULI is for the flexibility it provides for paying premiums. For example, if money is tight in the first couple of years or if you suddenly lose your job, you can lower your premiums and adjust it again once you have access to more income. So instead of defaulting and getting your coverage voided, you can still have the necessary protection without having to pay much in the meantime.
• The death benefit is adjustable – You can increase or decrease the death benefit of your policy which is something you can’t do with whole life. If you realize you need more (or less) coverage for death, you can simply increase or reduce the amount of premiums you’re paying (surrender charges may apply against the cash value should you decide to reduce it). Note also that you’ll probably need to undergo a medical exam if you want to increase your coverage.
• The interest rate of your cash value depends on its investment performance. Unlike whole life which guarantees a fixed rate, ULI has the possibility of earning more depending on the investment returns. Of course, the opposite situation can apply during negative returns, though it won’t dip below the guaranteed interest rate. Also note that if the insurance company is a mutual company, you won’t be rewarded profit dividends.
• Premiums may increase as you age – aside from being inherently more expensive than term life insurance, premiums of your ULI can rise over time.

Types of Universal Life Insurance

Universal life insurance comes in 3 forms. Here are its three main types:

• Indexed Universal Life Insurance
  • Its named as such because of the fact that the returns are linked to a stock index, like the S&P 500 or NASDAQ 100. Some policies will allow you to select multiple indexes and even the ability to decide how much percentage will go into indexed and fixed accounts.
  • Since its tied to a stock index, its performance will determine the rate of interest that will be credited into your policy.
  • It can be considered less risky versus Variable life insurance (below) since your money is not actually invested in positions of equity.
  • Gains are reset annually. Unlike stocks or mutual funds, gains in your cash value are locked in for one year—hence, it’s protected from the market’s ups and downs.
• Variable Universal Life Insurance
  • It’s life insurance and with a “more active” investment component since you can get to invest the cash portion of your premiums into mutual funds through “sub-accounts”.
  • Your rate of return, of course, will depend on the performance of your sub-account investment selections.
  • Ideal for policyholders who want to be actively involved in the investment of the cash value of their life insurance
• Guaranteed Universal Life Insurance
  • Also known as “No lapse” or “Secondary Guarantee Universal Life”, “GUL” is considered by many to be a hybrid between term and permanent life insurance
  • It’s more flexible than term life in coverage length since it’s Age-specific. Some policies even offer coverage lengths beyond 100 years of age.
  • It’s cheaper than its other permanent life insurance counterparts.
  • The most important thing is to make sure that premiums are paid on time so that you’ll keep level premiums and death benefits

Universal Life Insurance: Pros and Cons

Pros of Universal Life Insurance:

• Permanent life coverage (not exactly applicable to Guaranteed Universal) – Unlike term life, universal life insurance provides the guarantee of a death benefit which lasts for your entire lifetime.
• Flexible – One of the best reasons to get ULI is its flexibility. You can modify the amount of premiums you’re paying during the course of the policy. Conditions for changing it will apply but this essentially means you can still be able to pay for your insurance even when you’re a bit tight financially.
• Cash Value feature – This allows you to treat a portion of your insurance as a form of investment that grows over time. You can even borrow or withdraw funds without voiding the death benefit. For maximum benefits, some policyholders treat it like an IRA, funding the cash value as much as they can then let it accumulate (with interest) throughout the years.

The goal is to grow it big enough so that the premiums can be paid by the cash value. Plus, in the event you can’t pay your premiums, the company can tap into the cash value to cover it.

• Ability to utilize your insurance for investment purposes – Indexed and Variable Universal Life insurance both provide options to the policyholder to choose their own investment choices (stock index for IUL; sub-accounts for VUL).
• Tax-deferred growth – The death benefit and cash value portion of universal life insurance are tax-deferred.

Cons of Universal Life Insurance:

• Pricier than term life – This is by far the biggest differentiating factor and number one reason why people choose term over whole life insurance. Due to the cash value and investment features, universal life insurance is simply more expensive (but more flexible)
• Mortality cost may change over time – If you choose “Yearly Renewable Term” as opposed to “Level Cost”, understand that the mortality portion of the premium will change throughout the duration of the coverage. Some folks add a “No lapse guarantee” to go around this situation, allowing them to “lock-in” the premiums and death benefit over time.
• You still have to pay back what you borrowed – When you borrow against your cash value, the insurer will charge you interest. On some policies, this may even affect (reduce) the death benefit.
• Rates of interest might not be as high as you think – The growth rates of your cash value, due to interest, are in general, conservative. So don’t expect the cash value of your universal life insurance to rake in the same returns as your other investment vehicles. At best, you should consider it as an additional source of funds for later in life or almost like a fixed income investment.

What are the benefits of having cash value?

Here are some of the following uses for Universal Life Insurance Cash Value:

• For payments on your premiums – You have the option to pay a portion or the whole amount of premium using the cash value. This can be handy during times when you’re in a tough financial bind.
• You can use it as loan collateral – Some insurance companies offer the option to lend you money then use the cash value in your universal life insurance as collateral. Interest rates are set by the insurance company.
• It has a surrender value – In some cases, you may not want to continue your policy. You have the option to surrender it, and when you do the insurer will give you back the cash value in your account minus a surrender charge if applicable..

Who should get universal life insurance?

After knowing what Universal Life insurance has to offer, the big question now is—Is it for you? Here are some things to consider:

• Coverage that lasts a lifetime – Most folks who choose ULI do it mainly because they want a permanent policy. Great for those who have sizable real estate to protect and want to leave an inheritance and legacy to their loved ones.
• Options for paying premiums – If you think your ability to pay for premiums will change during the course of the coverage, ULI’s flexible payment options can be very attractive. You can lower or increase your payments depending on your financial situation.
• You want to have alternative “savings/emergency funds” – While not always recommended, having the option to borrow funds, especially when you have substantial cash value accumulation, provides another way for helping you and your family during tough financial situations.

• You’re timely on making payments for your premium. This is absolutely critical in making sure you won’t void the guaranteed benefits of your policy
• Donate to charity – You can utilize ULI for leveraging the money you have now and then leave it as a lump sum donation when you pass away. This is a common strategy for people who have deep ties with universities, churches, and other institutions and would like to gift them with monies upon death.

What will happen when my Universal Life Insurance reaches maturity?

Unlike term, Universal Life insurance covers you until a specific age. But what will happen when you live beyond your coverage? In most cases, you will receive an amount equal to the cash value you have.

Which should I choose: Term or Universal Life?

As always, the usual question from most people looking at different types of life  insurance policies is this, “How does this compare to term life insurance?”

Here’s the straightforward answer: If you think you’ll need more than basic coverage for a certain period of time (term), want flexible payment options, or a hybrid of term and permanent life insurance (Guaranteed Universal Life), then Universal Life is definitely worth checking out.

Aside from permanent life protection, what ULI has going for it are its flexible payment options and investment features (VUL and Index).

Important things to ask before buying Universal Life Insurance

It’s always recommended to shop around for the best deals before choosing a life insurance provider. Each company will has its own set of policies and conditions, so you have to do your due diligence to make sure you understand what they are before you sign on the dotted line. Here are some things to consider and ask your insurer:

• Minimum Premium Payment – One of ULI’s best features is its flexible payment terms. However, know that there’s a minimum amount set by the insurer which means you can’t simply decide to pay whatever amount you choose. Check what the minimum is so you can determine if it’s something that you can work with..
• Guarantees on the policy – Similar with premium payments, there’s usually a base floor rate for the guaranteed interest. Ask how long the guaranteed interest rate will be in effect as well, so as to clarify if there are certain conditions or situations when it can change.
• Fees and surrender charges – Surrender charges are fees you incur when you cash in, sell, or cancel your life insurance policy. Make sure you familiarize yourself of all potential fees so you know what to expect should you do one of these actions.

Next Steps

What do you think of Universal life insurance? Do you find its features useful and worth the money? How do you think it compares to term insurance? Let us know in the comments below!

If you are looking for more information about possible life insurance options, reach out to us directly to receive a free quote.