What Is Universal Life Insurance 

What Is Universal Life Insurance

Universal life insurance, like whole life insurance, is permanent life insurance. It is also referred to as cash value life insurance. Universal life insurance policies are often much more flexible than whole life insurance in that the premiums and death benefit can be adjusted.

Universal life insurance premiums are made up of two components:

  • The cost of insurance (COI) amount
  • A saving component known as cash value

The COI is based on the same things that determine the cost of premiums for other policies like term life insurance, namely age, tobacco use, other health factors, and the amount of coverage.

Premiums that exceed the cost of insurance fall into the cash value portion of the policy and accumulate over time. The cost of insurance will increase over time, but this accumulated cash value could cover the increase.

Cash Value: The Universal Life Insurance Saving Component

In much the same way as a savings account, a universal life insurance policy accumulates a cash value and pays interest based on the greater of the market or some minimum specified in the policy itself. Universal life insurance policies can also have an earnings rate determined by a stock, bond, or interest rate index. These types of policies are then referred to as an indexed universal life contract. Yet another variation allows the cash value to be directed to a separate account that would most closely compare with a mutual fund, investing in a variety of stocks and bonds. This variation is referred to as a variable universal life policy.

Types of Universal Life Insurance Policies

Type of Insurance How the Cash Value Grows
Universal Life Insurance (UL) Interest accumulates at market rates or a rate specified in the policy
Indexed Universal Life Insurance (IUL) Earnings are tied to a financial index, like an interest rate, stock, or bond
Variable Universal Life Insurance (VUL) Cash value is directed to one or more separate accounts that act like a mutual fund investing in one or more stocks and/or bonds

Confused? Don't be. The bottom line is that a universal life insurance policy has a cash value that earns money. How it earns money and with what is specific to the individual type of universal life policy. This cash value is accessible without any risk of impacting the death benefit, but withdrawals might have tax implications so consult with your financial adviser or accountant to fully understand this aspect.

At the time of death of the insured, any remaining cash value is kept by the carrier and not disbursed as part of the death benefit. Policyholders are also allowed to borrow against the cash value. This has its own fees, interest charges, and if the insured dies with an outstanding loan balance, the death benefit is reduced to cover it and any related fees and interest.

Term Life Insurance USA can match you with the best life insurance agent for your specific situation and help you navigate between the options of universal life insurance and others. Our network of vetted agents will always have your best interest at heart and not seek to line the pockets of a single insurance company to which they are captive.

Flexible Premiums for Universal Life Insurance Policies

Flexible might not be the right word — there is flexibility in the amount of the premium payment for a universal life insurance policy, but it's not as if you can just choose to pay some arbitrary amount and the policy will remain in force. Any flexibility at all is in stark contrast to whole life insurance where a set premium needs to be paid on time every month to prevent cancellation of the policy.

Over time the cost of insurance (COI) will always rise and the premiums for a universal life insurance policy will rise with it. If you've paid into the cash value of the policy over time, the cash value can cover the additional cost without requiring you to change your monthly payment. If you have enough cash value built up, you can even skip a payment without risk of losing the policy. Obviously you'd need to really stay on top of this by keeping up on your statements, or rather, checking the insurance company's app or website frequently.

Disclaimer: TermLifeInsuranceUSA.com is not a licensed insurance agency or broker. The content of this website is for informational and comparative purposes only and is not intended to take the place of professional advice from a licensed insurance agent. TermLifeInsuranceUSA.com recommends that all consumers consult with a licensed insurance agent before purchasing any insurance policy.

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