What is Universal Life Insurance?
If you’re shopping for a life insurance policy, universal life insurance is worth considering – it can help you build a cash value, offer flexibility, and last your entire life. However, this policy isn’t always the best option for everyone.
Keep reading to learn more about universal life insurance, the pros and cons, and if it’s right for you!
What is Universal Life Insurance?
Universal life insurance, or UL, is a form of permanent life insurance. Like other types of permanent life insurance, UL has a cash value and will give you lifetime coverage (as long as you pay your premiums).
While this is similar to whole life insurance, it differs in that you can lower or raise your premiums within limits, and it can actually be cheaper than whole life insurance.
How does Universal Life Insurance Work?
With a UL policy, your premium will go towards the cost of insurance (COI) amount and the remainder will go into investment returns to build up the cash value component. This cash value will earn an interest rate set by the insurer – this can change frequently, but most policies have a minimum interest rate.
The COI is the minimum premium payment amount, which will keep the policy active. This amount includes charges for policy administration, mortality, and other associated expenses. The COI will depend on your particular policy, factoring in insurability, age, and the risk amount.
Types of Universal Life Insurance
Below, you’ll find the most common types of universal life insurance policies.
Guaranteed Universal Life Insurance
With a guaranteed universal life insurance policy, you’ll get a death benefit no matter when you pass away, with premium payments that remain the same over time. This has minimal to no cash value, so it’s a great way to get guaranteed coverage for the rest of your life.
Guaranteed universal life insurance generally has competitive rates, and with many policies, you can modify coverage or even add on riders if needed. No matter how the market performs, this coverage will always have a minimum death benefit, so you’ll have more peace of mind.
The one disadvantage to this option is that if you miss a payment or are late on a payment, the policy could be terminated, with the insurance company keeping the premiums you’ve already paid.
Fixed Universal Life Insurance
Fixed universal life insurance, or FUL, is a form of permanent life insurance. Your premium will cover the COI, and the remainder will go into a cash account – this account’s value will increase based on the insurer’s set interest rate.
As the name suggests, the rate of return is fixed every year. The insurer will declare an interest rate for the year ahead at the end of the year. Then, the cash account will be credited with this payment. Because the rate stays the same, this can give the policyholder more peace of mind.
Indexed Universal Life Insurance
Also known as an IUL policy, this insurance is a form of whole life. Your premiums will be flexible and will cover the insurer’s fees plus the cost of insurance. The rest of the premium will be put into an investment account – the return will be linked to stock market returns. You can choose to link your policy to indexes like the S&P 500, the Hang Seng, and Eurostoxx.
Index life insurance is an excellent choice because premiums are lower than fixed or traditional life insurance. Plus, there’s a high potential for stock market growth without any of the risks of conventional stock market investing. As a result, this is the most popular kind of UL.
Variable Universal Life Insurance
This permanent life insurance has a cash value component that will be invested in a variety of investments, from stocks and bonds to mutual funds. The cash value of variable universal life insurance will depend on how these investments perform.
The big advantage to variable life insurance is that you can choose how your premium is invested, offering potentially higher returns than other kinds of permanent life insurance. On the other hand, this also comes with more risk, since the cash value fluctuates with the financial market.
Variable universal life (VUL) insurance usually comes with more flexible premiums, so you can choose how much you want to pay and adjust premiums as needed. As a policyholder, you’ll also be able to make changes to the policy, like altering the death benefit or changing your investment options.
Group Universal Life Insurance
This permanent life insurance policy covers an entire group of people – companies typically buy group universal life (GUL) insurance for all their employees. In this case, when an employee passes away, the death benefit is paid to the employee’s beneficiary as long as the deceased was an employee of the company when they died.
With some policies, spouses can also be included in the group life insurance. Each group member has a cash value that can either grow in value or be utilized for personal use. There are a few policies in which employees are allowed to take their group insurance policy with them even if they leave the company.
GUL policies are included in company benefits packages, which ultimately help attract and retain top talent within the company.
Universal Life Insurance Death Benefit
Depending on the type of universal life insurance, you will usually have the option to decrease your death benefit, which is a valid choice if you no longer need as much coverage.
Overall, there are two kinds of death benefits you can choose from:
- Level death benefit: This is when the death benefit remains the same throughout the policy. For example, if you buy $200,000 worth of coverage and build up $100,000 of cash value, your beneficiaries still receive $200,000 when you die.
- Increasing death benefit: While this option comes with higher premiums, it provides a higher benefit of the cash value plus the benefit. In the previous example, your beneficiaries would get $300,000, since the cash value is added to the death benefit.
Universal Life Insurance Benefits
There are several benefits to universal life insurance – here are some of the main advantages.
Flexible premiums
A UL policy allows you to change the frequency and size of your payments, which can be helpful if you’re going through a financial rough patch. On the other hand, paying less can put you at risk of a policy lapse, so be sure to check your policy before making these changes.
Flexible death benefit
Many policies allow you to increase or decrease the death benefit depending on your needs. However, increasing the death benefit may require a life insurance medical exam to pay for any extra coverage. You can usually increase the benefit once you’ve held the policy for a few years.
Potential cash value growth
Your cash value account will earn interest at your insurer’s set rate, but this rate can change frequently.
Allows policy loans
As a policyholder, you can borrow against the accumulated cash value without any tax considerations. Because the interest rates of these loans are often lower than personal loan rates and don’t require a credit check, this is a massive advantage if you need a quick and easy loan. However, keep in mind that unpaid loans will reduce the death benefit by the outstanding amount.
Disadvantages of Universal Life Insurance
Just because UL has several benefits doesn’t mean it’s for everyone – here are some of the cons to universal life insurance.
More risk exposure
UL seems like an incredible option when interest rates rise. However, when interest rates fall, the cash value may not grow as expected. Keep in mind that most policies have a minimum interest rate, though, which is an advantage.
You have to monitor your policy
Your policy can be underfunded if you don’t keep an eye on the cash value. This could leave you with several large payments to keep the coverage you originally signed up for.
Some withdrawals are taxable
Life insurance is usually taxed using a first in, first out (FIFO) method. This means that the policyholder will receive their investment in the contract before getting any gains in the policy (or being taxed on those gains). However, policyholders who withdraw more than they’ve paid into the policy will be taxed on their withdrawals.
Who Should Consider Universal Life Insurance?
When considering universal life insurance, there are many factors to keep in mind. This type of policy is great for people who want insurance protection and an investment component at the same time. It’s also great for people who want flexibility in premium payments and death benefits or if you are looking for a long-term insurance solution with potential cash value growth.
Overall, people who are the best contenders for a UL policy tend to be:
- High-net-worth individuals: This insurance option is ideal for those with substantial wealth who are looking for a tax-advantaged wealth transfer.
- People who want more flexibility: Universal life insurance provides policyholders not only with lifetime coverage but also with adjustable features.
- Individuals who can actively manage their policy: If you want more control over the cash value of your life insurance, UL is a great choice.
Getting a Quote for Universal Life Insurance
When you’re shopping for a universal life insurance quote, there are several factors that influence pricing, including:
- Age: Older applicants will usually have higher premiums since they have a higher risk of health conditions and death. On the other hand, younger people are more likely to get extremely competitive rates.
- Health status: Healthier people typically receive more favorable quotes, since they are less risky to insure. This means that working on improving your health can really pay off when it comes to life insurance. You can quit smoking, reduce alcohol consumption, exercise daily, clean up your diet, and keep up with your doctor’s appointments. If you have preexisting conditions, work on your health for a few months before applying for life insurance – if you improve your health, you may get better rates.
- Coverage amount: Higher coverage amounts usually mean higher premiums. So, if you have a large amount of coverage, you can expect to pay more in premiums.
- Policy type: Premium pricing will depend on your coverage type.
- Riders and add-ons: Additional features may increase costs.
Universal Life Policy Riders
Your insurance company may offer several riders with your policy – these are add-ons that can personalize your coverage, but come with an additional cost. Here are some of the most common types of riders:
- No lapse guarantee: As long as you pay the required annual amount, you can maintain the guarantee, but this may be higher than the billed minimum premium.
- Family riders: You can add coverage for additional family members, like your spouse or child, if needed.
- Waiver of cost insurance: If you become disabled, this pauses premium payments.
- Accelerated death benefit: With this option, you can access some or all of your death benefits while you are still alive if you are diagnosed with a critical, chronic, or terminal illness.
- Accidental death: This increases the payout if you pass away due to an unforeseen accident.
Be sure to compare insurance companies to find the right fit for you and your needs. You can focus on these two elements:
- Financial strength: You want a financially solid insurance company, so you know your cash value is safe and your beneficiaries will actually receive a payout when you die.
- Policy types: Choose a company with the policy options you seek. Not every company offers the riders listed above, and many companies have different fee structures.
Conclusion
Universal life insurance has countless benefits, from giving you peace of mind to providing an additional long-term investment strategy. This coverage is an excellent option for many people, but it will ultimately depend on your personal financial plan and situation.
For a guaranteed universal life insurance quote, contact Think Life today – we’re here with you every step of the way!