If you have people in your life who rely on you for financial support, then you’ve likely considered getting life insurance. Life insurance is a great way to ensure the people you care about will be taken care of if something unexpected occurs. Among the many types of life insurance policies out there, universal life insurance is a popular option.
What is universal life insurance?
Universal life insurance is a type of permanent life insurance policy, meaning it lasts the duration of your life, as long as you continue to pay the premiums. A major benefit of universal life insurance is that it offers flexible premiums and investment options.
How does universal life insurance work?
Premiums
Like most insurance policies, universal life policyholders pay premiums on a monthly or annual basis. However, with universal life insurance policies, policyholders have the flexibility to adjust their premium payments to suit their needs. While the premium amount is usually fixed, policyholders can either
- Overpay the premium and invest their cash
- Underpay the premium and use their invested cash to cover the rest
Cash Value
Like all permanent life insurance policies, universal life policies have cash value. The cash value is a savings and investment component built into the policy where a portion of each premium payment goes to the cash value. With a universal life policy, the cash value earns a low rate of interest, and policyholders can borrow against it tax-free.
Death Benefit
There are two types of death benefits associated with universal life insurance. When choosing a policy, it is important to review the policy’s death benefits before making a decision. The two types of universal life death benefits are:
- Level Death Benefits – your beneficiaries receive the face value of the death benefit at the time of death
- Increasing Death Benefits – your beneficiaries receive your death benefit’s lump sum payout plus the policy’s cash value
With universal life coverage, your death benefit is also flexible throughout the lifetime of your policy. If you have major life changes or decide you need more or less coverage, insurers allow you to adjust your benefits accordingly.
Types of Universal Life Insurance
Most universal life insurance policies are similar; however, there are some key differences across policy types. The biggest differences among universal life insurance policies revolve around two main factors:
- Investment potential
- Ability to adjust premiums and death benefits
Indexed Universal Life (IUL)
In an indexed universal life policy, the cash value interest rate is tied to the performance of an index fund, such as the S&P 500. Investing in an IUL’s cash value is less risky than in the stock market, as these funds are typically reliable and many indexed universal life policies have a set interest rate floor. Additionally, indexed universal life policies allow policyholders to make adjustments to premiums and death benefits over the course of the policy’s lifetime.
Variable Universal Life (VUL)
Similar to indexed universal life, variable universal life policies allow policyholders to make adjustments to premiums and death benefits. On the other hand, variable universal life policies invest your money into stocks and bonds, which makes it a more risky option compared to an indexed universal life policy.
Guaranteed Universal Life (GUL)
Guaranteed universal life policies are the least flexible of UL policies and have fixed premiums and benefits for the life of the policy. These permanent life policies are unique, however, in that you set an age at which the policy ends. Due to the simplicity of GUL policies, they are the least expensive universal life insurance policies.
Is universal life insurance good for me?
Whether you need universal life insurance or not depends on your current life situation and savings goals. If you are young, have long-term insurance needs, and can afford to make the investment, then it could be beneficial.
Another factor to consider is that universal policies require a one-time medical exam. So, if you are concerned that medical issues down the line could prevent you from getting life insurance, then investing in a universal policy may be advantageous.
You should also take into consideration your long-term financial goals. Most commonly, people use retirement and investment accounts to plan for the future. Nevertheless, if you are looking for an additional investment tool, then universal life insurance is a great way to plan for future costs while also having the security of life insurance.
Universal Life Insurance FAQs
What are the disadvantages of universal life insurance?
As with everything in life, there are several disadvantages that you should consider before investing in a universal life insurance policy.
Universal Life Insurance Cons
- Outstanding policy loans could reduce the death benefit amount your beneficiaries receive
- In many cases, a policy’s cash value must remain positive (i.e. in the black) to be active
- One missed premium payment could result in your policy being suspended
- Insurance companies have participation rates and caps, which can limit your investment potential
- Premiums and fees can be high
Do universal life insurance policies expire?
Universal life insurance policies are meant to last your entire lifetime. The policy’s expiration depends on how long you pay the premiums. If you keep them paid throughout your entire life, then your policy remains active.
How to Get Universal Life Insurance
Obtaining universal life insurance is not a difficult process, but finding a policy that is right for you may be complicated. Thankfully, our brokers at Principled Life are here to answer your questions, help you compare quotes, find the best offers, and walk you through the process. We work for you, so call today to find insurance that fits your life.
