What Is Universal Life Insurance?

Universal life insurance is a type of permanent life insurance that offers an investment savings element, in addition to low premiums.

Have you been thinking about purchasing universal life insurance but aren’t sure about the specifics? If so, the best way to begin is by learning about the key features of universal life (UL) policies, how the coverage works, what its pros and cons are, and how you can get coverage that suits your needs.

Key Takeaways

Universal life insurance offers permanent coverage, unlike term life
Universal Life policy premiums tend to be low
In a UL policy, there is an investment component and policyholders can build up cash value
When the policyholder dies, the death benefit alone is paid to beneficiaries
You can borrow against the cash value of a whole or universal policy

Key Features of a Universal Life Policy

Universal life (UL) is a type of permanent insurance: it offers coverage for your entire life, as long as you stay current on the premium payments, and a death benefit is paid to your beneficiaries when you die. Yet, universal life insurance offers a lot more flexibility than either whole or term life policies, as such it is sometimes called adjustable life insurance.

For starters, you can increase or reduce the amount of the death benefit and the premiums even after purchasing a policy. The premiums tend to be lower than for a whole life policy, similar to what you’d pay for term coverage. Furthermore, UL policies come with an investment component that is represented by a cash value.

When it comes to premiums, universal life insurance has three options. The majority of products have flexible premiums, but others feature fixed premiums (similar to term life coverage) or lump-sum premium payments.

How Does Universal Life Work?

The premiums you pay on a UL policy consist of two things, a savings – or investment – portion and a flat “COI,” or cost of insurance.

The investment component is the part that adds to your cash value as the policy ages. It is like a savings account, any interest accrued on the investment is credited to your account. You can borrow or withdraw money over time, or it can be used to pay for premiums if needed.

After the policy has been in effect for a period of years, you will have the option to pay only the COI portion if you don’t want to add to the cash value. This adjustable feature is one of the things that makes UL unique.

Likewise, policy holders have the choice to increase or decrease the death benefit, which has an effect on the amount of the total premium. This overall flexibility is the reason many people opt for universal life policies.

Universal Life Policy Pros and Cons

The main advantage of UL policies is that you can borrow against the cash value at any time. Plus, the built-up value earns interest at the higher of the market rate or the minimum rate stated in the policy. When you borrow against the cash value, there is no change in the death benefit or the premiums.

On the downside, it’s possible you could get stuck for a tax bill when you take money out of a UL policy, depending on your financial situation at the time of withdrawal. However, there is no tax due (in most cases) if you merely borrow against the cash value and repay that loan in a timely fashion. When the policyholder dies, the carrier pays the death benefit but keeps whatever cash value has accumulated to that time.

If you want to skip premiums, you can do so as long as you have enough built-up cash value to cover the payment. And, whenever you do make premium payments, you can remit any amount above the COI as you wish. That excess goes toward the savings/cash component of the policy. This is how policyholders are able to enjoy the “flexible premium” advantage of UL.

Pros of Universal Life Insurance

Lifelong coverage
Usually lower premiums than whole life insurance
Flexibility when it comes to paying premiums
Ability to adjust the face value of your coverage without surrendering your policy
Guaranteed minimum cash value interest rate, can perform better depending on market
Ability to borrow against the cash value at any time

Cons of Universal Life Insurance

Cash value interest rate are not guaranteed
Cash value interest rates often depend on market conditions and the insurer’s portfolio performance
Premiums are not fixed and can increase over time
The "insurance coverage" portion of your premiums will change overtime and will most likely increase as your health deteriorates
Universal life policies often have high annual investments fees, up to 3%.

Getting Coverage

If you want to purchase universal life coverage for you and your family, decide on the amount of premiums you can afford from the beginning. Find out about the exact amount of the COI as it is broken down within every premium from the day you acquire the policy.

It’s wise to view a chart of accumulated cash value so you’ll be able to see how soon you would be able to access a withdrawal or policy loan of a certain amount.

You’ll need to choose among variable, guaranteed, and indexed UL coverage. Variable universal policies let you choose a mutual fund into which the cash/savings portion is invested. Guaranteed universal life policies build little cash value but do have fixed premiums. Finally, indexed UL polices earn interest based on one of the major market indices. If the market does well, you could see a significant rise in your cash value, but if it does poorly, that built-up savings component could take a hit.

Get an instant universal life quote

You can easily end up spending hours doing your research and analyzing coverage options, insurance premiums and deductibles... or you can let us do the work for you!

Get a Quote

If you have any other questions about universal life insurance, be sure to reach out to your agent.