Universal Life Insurance
(You can adjust your premiums, though you’ll want to keep tabs on your policy’s growth.)
Written by
Andrew Flueckiger in an insurance writer for TrustedChoice.com. He's a licensed insurance agent who has earned his CIC designation and has written extensive insurance articles for many publications.
Universal life insurance is a popular choice for many people who want lifelong insurance coverage, mainly because you can choose how much money you put into the policy, up to a certain point. The flexibility of a universal life insurance policy makes it a popular choice, though it may not actually be the best choice for you.
A UL’s flexibility is both its strong suit and its potential pitfall, which means you’ll probably want to seek out the advice and knowledge of an independent insurance agent before deciding which type of permanent policy is best for you.
What Is Universal Life Insurance?
Universal life insurance is a type of permanent life insurance, which means it stays in effect for your entire life and builds a cash value component.
It differs from other types of permanent life insurance options, such as whole life insurance, by giving you the flexibility to adjust certain aspects of your policy. The two parts of your policy that you can change are the death benefit and your premium.
Your UL’s premium will have a minimum payment that’s required to keep the policy active. You can choose to pay this amount, or you can choose to pay a higher amount. The extra money you pay goes directly into your cash value, allowing it to grow at a faster rate than simply paying the minimums.
As your policy grows, your cash value might reach a point where it can pay for your premiums, but once your cash value runs out, your policy will lapse.
You can also adjust your death benefit within a specified amount. Lowering your death benefit can help lower your premium payments.
If you pull out some of your cash value and never “repay” that amount into your policy, then your death benefit will be reduced by the same amount that you took out.
Is Universal Life Insurance Right for Me?
The flexibility of universal life insurance can be a benefit to some people, but it requires you to fully understand how the policy works and to monitor the cash value and death benefit amounts.
If you don’t want to keep tabs on your life insurance policy, then universal life insurance isn’t a good fit for you – you might prefer the fixed numbers of a whole life insurance policy.
Universal life insurance could make sense for some people who value the permanent coverage and cash value, but also need the greater flexibility that comes with a UL policy. That could include:
- Families with special needs children or who care for an extra family member. Their financial needs may change over time, so having a permanent policy with adjustable premiums could be beneficial.
- Pensioners who want long-term coverage but can’t afford the fixed costs of whole life insurance.
- Wealthy people who want tax-free inheritance and who also want to be able to have greater control over their life insurance’s cash value.
A universal life insurance policy may be a good fit for anyone who likes the permanent coverage and cash value build-up, but doesn’t necessarily want to have control over the investments that a variable life insurance policy brings.
A UL’s main strong points are its adjustable premium and death benefit, allowing you to grow your policy when you’re able to or just make minimum payments if your budget is tight.
But universal life’s main negative is that it requires you to monitor what’s happening with your policy. The greater flexibility can result in your cash value not building to a point where you can use it in a meaningful way if you’ve only paid the minimum amounts.
It could even result in your policy lapsing if you start using the cash value to pay for your premiums without keeping track of the remaining cash value amount.
Comparing Universal Life Insurance Options
There are a few different types of universal life insurance policies available, each with slightly different additions to the adjustable premiums and death benefit of a standard universal life insurance policy.
- Guaranteed universal life. This type of UL doesn’t allow you to adjust the premiums or cash value. It’s designed as a lower cost alternative to whole life insurance, with permanent coverage but with a much lower cash value build-up rate than whole life or standard universal life.
- Variable universal life. A variable universal life policy lets you choose which stock market options your cash value will be invested in, though the options are limited to what your insurer gives you.
- Indexed universal life. Similar to variable policy, although you won’t be able to choose which stocks your cash value invests in. Rather, the cash value will be tied to a stock market index, such as the S&P 500 or the NASDAQ-100.
- Survivorship universal life. A survivorship life insurance policy is mainly used for inheritance or charity contributions. The death benefit will only be paid out when both owners, typically a married couple, pass away.
- Joint universal life. Joint life insurance is similar to survivorship in that there are two owners of the policy, but the death benefit will be paid out to the surviving person after the other passes away.
Save on Life Insurance
Our independent agents shop around to find you the best coverage.
How Can I Use the Cash Value from My Universal Life Insurance?
The cash value of your universal life insurance policy is your money; you can do whatever you want with it. Cash value grows over time, so you may want to let it sit and grow before taking it out.
Popular ways of using cash value include:
- Retirement income
- Paying off a mortgage or buying a second home
- Funding a child’s education
- Paying for medical expenses or retirement homes
The cash value of a universal life insurance grows on a tax-deferred basis, which means you won’t pay taxes on its growth.
Borrowing your cash value is also tax-free money that’s available to you at any time. If you decide to take out your cash value, you’re essentially taking out a loan from your own money. You also don’t technically have to “repay” that money back into your policy. However, if you don’t pay the money back, your insurer will charge you interest on the amount that you took out and will deduct that interest from your death benefit.
If you take out all of your cash value or if the interest amount that you owe becomes larger than your policy is worth, then you will surrender your policy and it won’t be active anymore.
Comparing Premium Options for Universal Life Insurance
Premium flexibility is one of the advantages of universal life insurance. Your premium options include:
- Single premium – This is a one-time lump sum initial payment that pays for the purchase of the policy.
- Fixed premium – Where specific amounts of premium are paid periodically and usually last less than the life of the policy.
- Flexible premium – Allows you to vary the amount of premiums you pay within certain limits.
The Benefits of an Independent Insurance Agent
Universal life insurance is a fairly complex life insurance product that may not be your best option, though it does have its benefits. By going through an independent insurance agent, you’ll receive personalized service and expert knowledge that can help you choose which option is best for you and the pros and cons of each policy type.
An independent insurance agent can also get quotes from multiple insurers, allowing them to give you the most comprehensive coverage for the best price.