Universal life insurance is a type of life insurance that provides coverage for your life. It is also known as life insurance. This type of insurance gives you flexibility than whole life insurance. You can change your premium payment and death benefit as your financial needs change. Universal life insurance also build cash value over time which you can use while you are still alive.
Unlike term life insurance is meant to the last your life as long as you pay your premiums and meet the policy requirements. The National Association of Insurance Commissioners says that universal life insurance is a type of coverage that combines life insurance with a cash value account.
How Does Universal Life Insurance Work?
When you pay your life insurance premium the money is divided among the cost of the insurance, policy expenses and cash value. The cash value part can earn interest depending on the policy.
The good thing about life insurance is that it is flexible. You can. Decrease your premium payments and you can also change your death benefit. However if you pay little your cash value can go down and you might have to pay more in the future or your policy could lapse.
[Premium Payment] –> [Cost of Insurance]
–> [Policy Expenses]
–> [Cash Value]
–> [Interest/Crediting]
–> [Policy Loan or Withdrawal]
[Death Benefit] –> [Beneficiaries]
Universal Life Insurance Cash Value
The cash value is an important part of universal life insurance. Depending on the policy you can use the cash value to pay premiums take out a loan or withdraw money. If you take out a loan you will have to pay interest. It can reduce the death benefit if you do not pay it back.
The cash value can grow at rates depending on the type of life insurance policy you have. Some policies are tied to the stock market while others are more predictable.
Types of Universal Life Insurance
There are a few types of universal life insurance:
Traditional universal life: This type of policy gives you premiums and cash value accumulation.
Indexed universal life: This type of policy credits interest based on a market index. It also has rules to limit your potential gains and losses.
Variable universal life: This type of policy lets you invest your cash value in stocks and bonds which can be riskier.
Guaranteed universal life: This type of policy emphasizes a guaranteed death benefit and premium structure with focus on cash value growth.
The NAIC says that variable universal life insurance can be riskier because it is tied to the stock market while indexed universal life insurance is a mix of fixed and variable characteristics.
Universal Life vs. Whole Life Insurance
Both universal life and whole life insurance are types of life insurance but they are different. Universal life insurance gives you flexibility with your premiums.
Universal Life Insurance Pros and Cons
Pros
- You get lifetime protection if you maintain your policy
- You can change your premium payments
- You can build cash value over time
- You can use your cash value while you are still alive
- You can adjust your coverage
Cons
- It can be more complicated than term life insurance
- If you do not pay enough your policy could lapse
- Your cash value can go up and down
- If you take out a loan or withdraw money it can reduce your death benefit
- It is generally more expensive than term life insurance
Taxes, Loans and Withdrawals
The death benefit from a life insurance policy is usually not taxable. However if you take out a loan or withdraw money from your policy it can be taxable.
Is Universal Life Insurance Worth It?
Universal life insurance might be a choice for you if you need permanent coverage and want to be able to change your premium payments. However it might not be the choice if you are looking for simple low cost insurance.
Before you buy a policy you should carefully review the terms. Understand what is guaranteed and what is not. You should also compare policies and the review your coverage regularly to make sure it still meets your needs. The NAIC recommends that you do this to make sure you get the policy for you.
FAQs
What is universal life insurance?
Permanent life insurance with flexible premiums and the cash value.
How does universal life insurance work?
Premiums fund insurance costs, expenses and cash value.
Is universal life insurance permanent?
Yes if the policy remains adequately funded.
What are the types of universal life insurance?
Traditional UL, IUL, VUL and guaranteed UL.
Does universal life insurance build cash value?
Yes cash value can grow based on the policy terms.
