What Is Universal Life Insurance?
Universal life is a type of permanent life insurance. These policies combine lifelong coverage with a cash value that grows over time.
Permanent life insurance differs from term life insurance, which only lasts for a specific time period, such as 20 years.
Flexibility is a unique feature of universal life policies. Most universal life insurance policies allow you to modify or skip premium payments under certain circumstances.
You can also adjust the death benefit coverage amount more easily with a universal life policy than other types of life insurance.
A common feature across all types of permanent life insurance is a growing cash value you can borrow against. Cash value gains grow tax-free.
Universal life insurance policies accumulate cash value based on current interest rates. Your monthly or yearly premiums will likely increase as you age.
However, once your cash value is large enough, you can access part of it without affecting the policy’s guaranteed death benefit.
For this reason, some policy holders choose to pay the maximum premium during the first several years of coverage in order to grow a substantial cash value. That money can then be tapped to cover higher premium payments in the future.
Universal life insurance shares many similarities with whole life insurance.
A major difference is that whole life policies offer predictable, fixed premiums and guaranteed cash value accumulation while universal life policies feature adjustable premiums and death benefits.
Types of Universal Life Insurance
There are a few common types of universal life insurance policies, and each one offers unique features and benefits.
- Indexed Universal Life
- The cash value growth of an indexed universal life policy is linked to a stock market index, such as the S&P 500 or Dow Jones Industrial Average. There’s usually a cap on how much you can earn. And you may still lose all your cash value if insurance company charges and expenses eat through your money.
- Guaranteed Universal Life
- These policies offer a lower cost option that guarantees a fixed death benefit to your heirs. The cost of coverage is usually much more affordable than standard universal life insurance. Premiums typically remain fixed for the length of the policy. However, these policies generally have little or no cash value. Guaranteed universal life insurance also doesn’t typically offer flexible premiums or death benefits.
- Variable Universal Life
- These policies build a cash value that can be invested into separate accounts, similar to mutual funds. This gives you the potential for above-average cash value growth along with greater control over your investments. However, insurance management and administrative fees tend to be higher for variable life policies when compared to other options.
Universal life insurance can also be structured for two people at once.
For example, a survivorship universal policy covers two people and pays a death benefit when the last person insured under the policy dies.
A joint universal life insurance policy is another way to include two people on one policy. The death benefit is paid when the first policy holder dies.
Is Universal Life Insurance Right for You?
Universal life insurance offers benefits such as adjustable premiums and coverage that never expires.
Policies also trend cheaper than other forms of permanent life insurance, such as whole life.
However, universal life premiums are still more expensive than term life insurance options.
For example, according to Senior Market Sales, a 45-year-old man purchasing a guaranteed universal life insurance policy with a $1 million death benefit can expect to pay about $9,948 a year for coverage.
For this reason, many experts recommend term life insurance for the average consumer.
Still, universal life insurance offers tax advantages that may be appealing to wealthier consumers.
A policy’s death benefit can be used to fund a trust fund for heirs or secure an endowment for your favorite charity.
You may also consider a universal life insurance policy if you need both an investment vehicle and life insurance.
However, most experts only recommend exploring cash value life insurance after maxing out other retirement savings vehicles, such as a 401(k) or IRA.
5 Cited Research Articles
- Chorpenning, A. (2020, July 17). Understanding Universal Life Insurance. Retrieved from https://www.forbes.com/advisor/life-insurance/universal-life-insurance/
- California Department of Insurance. (2018, March). Life Insurance Guide. Retrieved from http://www.insurance.ca.gov/01-consumers/105-type/95-guides/07-life/life-ins-guide.cfm
- DaveRamsey.com. (n.d.). What Is Universal Life Insurance? Retrieved from https://www.daveramsey.com/blog/universal-life-insurance
- National Association of Insurance Commissioners. (n.d.). Life Insurance Buyer’s Guide. Retrieved from https://www.naic.org/documents/consumer_guide_life.pdf
- New York Department of Financial Services. (n.d.). Universal Life Insurance. Retrieved from https://www.dfs.ny.gov/consumers/alerts/universal_life_insurance