Universal Life Insurance

What is universal life (UL) insurance?

Universal life (UL) insurance is a type of permanent life insurance that offers flexible premiums and death benefits. It combines traditional life insurance but with a savings or investment component, known as the cash value.

UL insurance is typically more expensive than term life who provides coverage for a specific period of time instead of a lifelong coverage. It may be a good option for individuals who want the flexibility and potential savings or investment benefits of a permanent life insurance policy. It's important for policyholders to carefully review the terms and conditions of their UL policy to fully understand the coverage and benefits provided.

How does universal life insurance work?

How it works is fairly simple: you pay premiums towards a death benefit until the end of your contract, while part of the premium is put towards an investment account. 

This investment account earns interest, which can be used as part of the premiums paid or withdrawn at any time. The policyholder also has the option to change their death benefit amount if necessary. 

Pros and cons of universal life insurance

Here are the main advantages of having universal life insurance: 

1. Flexibility: Policyholders can adjust their premiums and death benefit amounts to meet their changing needs.
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2. Cash value: Universal life policies have a cash value component that can be used as a savings or investment vehicle. Policyholders can borrow against the cash value or withdraw it in the future if needed.
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3. Potential tax advantages: The cash value of a universal life policy may accumulate on a tax-deferred basis, which means policyholders may not have to pay taxes on the growth of their cash value until they withdraw it.
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4. Coverage for life: Universal life insurance policies provide coverage for the policyholder's entire life, as long as premiums are paid and the policy is in force.

Here are the pros:

1. Higher premiums: Universal life insurance premiums may be higher than those of other types of life insurance policies, such as term life.
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2. Complexity: Universal life insurance can be more complex than other types of life insurance, and policyholders may need to carefully review their policy terms and conditions to fully understand their coverage and benefits.
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3. Interest rate risk: The cash value component of a universal life policy is typically invested in a general account that earns a variable rate of interest. If the interest rate falls, it can impact the policy's cash value and death benefit.
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4. Surrender charges: If a policyholder decides to cancel their universal life insurance before it has matured, they may be subject to surrender charges.
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5. Policy loans: Policyholders who take out a loan against their universal life insurance cash value may be required to pay it back with interest. If the loan is not repaid, it can reduce the policy's death benefit.

When is universal life insurance right for me?

It all depends on your particular situation, financial goals and budget. If you are looking for long-term protection and want to maximize potential returns from an investment component in your policy, then UL coverage might be right for you. It's important to understand that UL policies come with higher risk than whole life policies, so they might not be suitable for everyone. 

Types of universal life insurance (Guaranteed, Indexed, Variable)

1. Guaranteed UL: This type of universal life insurance has a fixed premium and a guaranteed death benefit. The policy does'nt have an investment component and the cash value grows at a guaranteed fixed rate. This type of policy is suitable for individuals who want the security of a guaranteed death benefit and don't want to take on the risk of investment-based policies
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2. Indexed UL: This type of universal life insurance has a flexible premium and a death benefit that is linked to the performance of a stock market index (ex: S&P 500). The policy has a minimum guaranteed rate of return but the cash value can potentially grow at a higher rate if the index performs well. On the other hand, if the index performs poorly, the policy may not earn any additional cash value. This type of policy is suitable for people who are willing to take on a moderate level of risk in exchange for the potential for higher returns
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3. Variable UL: This type of universal life insurance has a flexible premium and a death benefit that is linked to the performance of underlying investment options, such as mutual funds. The policy has a minimum guaranteed rate of return, but the cash value can potentially grow at a higher rate if the investments perform well. Like the indexed UL, if the investments perform poorly, the policy may not earn any additional cash value and the policyholder may need to pay higher premiums to maintain the policy. This type of policy is suitable for individuals who are willing to take on a high level of risk in exchange for the potential for higher returns

Which is better - Whole life or universal life?

Ultimately it comes down to what works best for your individual circumstances and goals. While whole life insurance offers superior cash values usually, universal life provides more flexibility in terms of how much money goes into the death benefit versus the cash value component. 

Additionally, universal life tends to have lower premiums but also has fewer guarantees than whole life policies regarding cash values or death benefits. 

What is the difference between universal life insurance and whole life insurance?

The main difference between them lies in how these two types of permanent life insurance policies accumulate their cash value over time - whole life ties its growth rate directly to investments made by the insurer whereas universal life ties its growth rate directly to an adjustable interest rate set by the insurer periodically. 

Furthermore, universal life has more flexible premium payments compared to whole life which requires fixed payments every month throughout the duration of the term.

Frequently asked questions

Can I adjust the premiums or death benefit of my universal life insurance policy?

Most universal life insurance policies allow adjusting the premiums within certain limits. This flexibility can be useful if your financial situation changes. However, it's important to keep in mind that adjusting the premiums may affect the policy's performance and cash value.

Furthermore, your universal life insurance policy may allow you to adjust the death benefit within certain limits. For example, increasing or decreasing the death benefit by adding or removing riders - or by making changes to the policy's underlying investments. It's important to carefully consider any changes to the death benefit, as they may affect the policy's premiums and cash value.

It's also important to note that any changes to the premiums or death benefit of a universal life insurance policy may require you to undergo additional underwriting or to provide updated information about your health. It's always a good idea to discuss any changes with your insurance provider or financial professional before making a decision.

Can I borrow against the cash value of my universal life insurance policy?

Yes, most universal life insurance policies allow the policyholder to borrow against the cash value. This is known as a policy loan. Policy loans can be useful for policyholders who need access to cash but do not want to sell their policy or deplete the death benefit.

To borrow against the cash value of a universal life insurance policy, the policyholder typically needs to request a loan from the insurance provider. The insurance provider will then assess the policy's cash value and determine the amount of the loan that can be approved. The policyholder will be required to pay interest on the loan, and the interest rate may vary depending on the terms of the policy and the insurer's policies.

It's important to keep in mind that borrowing from the cash value of a universal life insurance policy may affect the policy's performance and cash value. If the policy's cash value is not sufficient to cover the loan and the interest, the policy's death benefit may be reduced, and the policy may lapse if the loan is not repaid. It's always a good idea to carefully consider the terms of a policy loan and discuss any potential impacts on the policy with your insurance provider or financial professional before borrowing from the policy's cash value.

What happens to the policy if I stop paying premiums?

If you stop paying premiums on your universal life insurance policy, the policy may lapse, and the death benefit will no longer be in effect. This means that if you die while the policy is lapsed, your beneficiaries will not receive the death benefit.

In some cases, a universal life insurance policy may have a grace period during which the policyholder can pay the overdue premiums and reinstate the policy. The grace period typically lasts for 30 days after the premium due date, and it is specified in the policy's terms and conditions. If the policyholder is unable to pay the overdue premiums within the grace period, the policy may lapse.

It's also important to note that if you stop paying premiums on a universal life insurance policy, the policy's cash value may be reduced if it is used to pay premiums or if the performance of the underlying investments is not sufficient to maintain the policy's cash value. This can affect the policy's ability to provide a death benefit and may result in the policy's cash value being insufficient to cover any policy loans or outstanding policy expenses.

If you are having difficulty paying your premiums or if you are considering stopping premium payments on your universal life insurance policy, it's a good idea to discuss your options with your insurance provider or financial professional. They may be able to help you find ways to keep your policy in force or to make alternative arrangements.

Can I cancel my universal life insurance policy?

Yes, you can cancel your universal life insurance policy at any time by contacting your insurance provider and requesting a cancellation. However, it's important to keep in mind that cancelling a universal life insurance policy may have financial consequences, as you may not be able to recover the paid premiums or the cash value of the policy.

It's also important to carefully review the terms and conditions of your policy to understand any potential impacts on the cash value or death benefit.

Furthermore, you should understand the potential consequences of cancelling the policy on your beneficiaries, as they may no longer be financially protected.

Before anything, It's a good idea to speak with your insurance provider or financial advisor before cancelling a universal life insurance policy. They can help you understand the potential consequences and can assist you in making an informed decision. They may also be able to suggest alternative options, such as reducing the policy's death benefit or adjusting the premiums, that may better suit your current financial needs.