What is Universal Life Insurance?
Universal life insurance is a type of permanent life insurance that offers flexibility and the ability to adjust coverage as your needs change. Unlike traditional whole life insurance, universal life allows policyholders to adjust their premium payments and death benefit amounts as their financial situation changes. This means that you have the ability to pay more, less or even skip payments based on your current financial situation. Additionally, Universal life insurance typically has a cash value component that grows over time and can be accessed for emergencies, retirement or other financial needs.
One of the key benefits of universal life insurance is that it can provide a death benefit to your beneficiaries while also providing a savings component that can grow tax-deferred over time. This can make it a great option for those who want to provide for their loved ones in the event of their passing while also having the ability to access cash value for other financial needs. Another benefit of universal life insurance is that it offers more flexibility and control over your policy than traditional whole life insurance, allowing you to adjust coverage and premium payments as your needs change.
Who is Universal Life Insurance For?
Young Married Couples
Universal life insurance is a good choice for young couples, as it offers flexibility in coverage, premium, and term. It is also affordable and can supplement other types of insurance. It also allows for customizable death benefit options.
Business Owners
Business owners can select a universal life policy that aligns with their objectives. A wise investor may opt for an index universal or variable universal life policy for rapid cash value growth, and then use the value to cover premiums later on. Alternatively, the cash value can be utilized to fund business expenses or purchase additional life insurance.
Sole Financial Providers
A universal life policy offers flexibility to support families financially, by enabling premium adjustments to help them manage financial difficulties while the sole provider is alive.
Significant Debt
Individuals with more debt have a greater need for life insurance. Universal life policies allow for flexibility, as debts are paid down, policyholders can reduce their death benefit and lower their premiums. With an index universal or variable universal policy, cash value growth can be used to pay off debt more quickly.
Stay-at-Home Parents
Stay-at-home parents may not receive income, but their role in the home can be expensive to replace. A universal life policy can adapt to changing needs as the family grows. If the stay-at-home parent passes away, the death benefit can give the working parent the option to stay home or return to work. The policy’s cash value can also be used to pay off debts, expenses or premiums.
Universal Life Insurance Coverage Options
Universal life insurance includes various policy types that let you choose how you want your cash value to earn interest.
Simple Universal Life
Simple Universal Life pays a defined interest rate. The policy contract guarantees a minimum rate, but the company can pay a higher rate based on favorable market conditions. The interest rate can vary over time but never goes below the guaranteed minimum rate.
Index Universal Life
Index Universal Life allows you to allocate part of your premium in accounts indexed to the S&P 500® or S&P MARC 5 ER® market indexes. You can choose either or both to help you grow your cash value with growth potential tied to a market index. Unlike investing directly in the stock market, the Index Universal Life policy guarantees a zero percent floor that may help you protect your assets from market-related losses in years when indexes perform poorly.
This indexed arrangement offers the potential for more rapid growth with the protection of the floor, but it may be a little more unpredictable than Simple Universal Life.
Pros of Universal Life Insurance
Flexible Premiums
With universal life insurance, you have the flexibility to make premium payments at any time and in any amount, within certain limits, after the first payment. It provides long-term coverage with lower and more adaptable premiums compared to whole life insurance.
Supplement Increased Premiums with Cash Value
Like a Roth IRA, this policy’s cash value can be built up by paying higher premiums in the early years. This will help supplement increased premiums as you age.
Investment Options
Your insurance company may offer investment options for the cash value portion of your policy, such as an equity index strategy, term deposit or interest account. This will depend on your policy details.
Market Flexibility
Universal life insurance policies invest in a market-type fund that pays a current market rate of return. They may yield higher returns in a strong market than fixed-rate whole life insurance policies. However, returns are not guaranteed.
Access Cash Value
You can access the cash value during your lifetime for any reason, generally income-tax free.
Cons of Universal Life Insurance
High Premiums
You can adjust your premium payments based on your current finances, however, the cost of insurance will increase as you age. To build cash value for later years, you may need to pay higher premiums in the early years of your policy. If you don’t have a no-lapse guarantee clause and you don’t pay enough, your policy may lapse.
Strict Stipulations
A “no-lapse” guarantee ensures the policy stays active. However, some companies may cancel policies if payments are made even one day late, in order to qualify for this guarantee.
Requires Monitoring
It’s important to keep track of your cash value and not rely on promises made by agents during the sales process. If you don’t review and adjust accordingly, the cost of your policy could increase.
Universal Life Insurance FAQs
What is universal life insurance?
Universal life insurance is a type of permanent life insurance that combines the death benefit protection of traditional life insurance with a cash value component that can grow over time. The cash value component earns interest and can be used to help pay the policy’s ongoing costs, such as premiums.
How does universal life insurance differ from whole life insurance?
While both universal life insurance and whole life insurance are permanent life insurance policies, universal life insurance typically offers more flexibility and higher potential cash value growth than whole life insurance. This is because universal life insurance premiums are typically lower, and the policyholder can adjust the coverage amount and premium payments to fit their changing needs.
How is the premium for universal life insurance determined?
The premium for universal life insurance is determined by several factors, including the policyholder’s age, health, the amount of coverage requested, and the interest rate earned on the cash value component. The policyholder can also adjust their premium payments to fit their budget, but it may affect the cash value component growth.
What is the minimum premium for universal life insurance?
The minimum premium for universal life insurance will vary depending on the policy and the insurance company. It’s important to check with the insurance company or a financial advisor to determine the minimum premium for a specific policy.
How do I know if universal life insurance is right for me?
Universal life insurance may be a good option for those who want permanent life insurance coverage and the potential for cash value growth. It may also be suitable for those who want more flexibility in adjusting their coverage amount and premium payments over time. It’s important to consult a financial advisor to determine if universal life insurance is the best fit for you.
Are there any tax benefits to universal life insurance?
Yes, death benefits from a universal life insurance policy are typically paid to beneficiaries tax-free. However, any interest earned on the cash value component may be subject to taxes, depending on the policyholder’s state of residence.
Can I convert my universal life insurance policy to a different type of life insurance policy?
Yes, policyholders can typically withdraw money from the cash value component of their universal life insurance policy, but it may decrease the death benefit and cash value component. Withdrawals may also be subject to taxes, depending on the policyholder’s state of residence.
How does the cash value component work in universal life insurance?
The cash value component in universal life insurance is a savings component that earns interest and can be used to help pay the policy’s ongoing costs, such as premiums. The cash value component can grow over time, but it is also affected by the policyholder’s premium payments and the interest rate earned on the cash value component.
Can I withdraw money from the cash value component?
Yes, policyholders can typically withdraw money from the cash value component of their universal life insurance policy, but it may decrease the death benefit and cash value component. Withdrawals may also be subject to taxes, depending on the policyholder’s state of residence.
How does the interest rate affect the cash value component?
The interest rate earned on the cash value component affects the potential growth of the cash value component in universal life insurance policy. Generally, the higher the interest rate earned, the higher the potential cash value growth.
How do I adjust my coverage amount and premium payments?
The policyholder can adjust their coverage amount and premium payments to fit their changing needs, but it may affect the cash value component growth. It’s important to consult the insurance company or a financial advisor before making any changes.