A Guide To Universal Life Insurance.

Shawn Plummer

CEO, The Annuity Expert

A popular type of permanent life insurance is called universal life insurance (UL). It comes with cash value, and you can set the premiums to what you want. So if you don’t spend as much on premiums, some money will come from your cash value in the policy. A UL policy is designed for people trying to build a nest egg without going into a higher income or permanent need.

What is universal life insurance?

A universal life insurance policy is a type of permanent life insurance that offers flexible coverage and premiums. UL policies are designed to last the insured’s entire lifetime, building cash value over time. Universal life insurance policies offer death benefit protection and the potential to accumulate a cash value that can be accessed through policy loans or withdrawals. Because universal life insurance policies are designed to last a person’s entire lifetime, they often have higher premiums than other permanent life insurance policies, like whole life or indexed universal life.

However, despite their higher premiums, UL insurance policies can be a valuable financial planning tool for individuals looking for long-term coverage that offers flexibility and potential cash value growth.

How Does Universal Life Insurance Work?

Universal life insurance offers death benefit protection and the potential to accumulate cash value over time. Typically, universal life insurance policies consist of two key components: a basic death benefit coverage, which remains level throughout the policy’s life, and an investment account that accumulates cash value based on market performance.

The cash value component is similar to other permanent policies, such as whole life or indexed UL. This account contains funds invested by the insurance company on behalf of the insured. It earns interest over time based on market performance and the policy contract terms.

One key difference between UL insurance and other types of permanent insurance is that universal policies offer more flexibility in premiums and death benefit coverage. Policyholders can choose to increase or decrease their premium payments and death benefit coverage, subject to certain limits set by the insurance company. This flexibility can make universal life insurance a good choice for individuals who want permanent life insurance coverage but may not be able to pay high premiums regularly.

In addition, universal life insurance policies typically offer more flexible options for accessing the cash value than other types of permanent insurance. For example, policyholders can typically take out loans or withdraw from their cash value account without triggering a taxable event. This can make UL a valuable financial planning tool for individuals looking to grow their cash value over time and access those funds when needed.

How To Use Universal Life Insurance Cash Value

You can use the cash value to pay your premiums with universal life insurance. The policy lasts your whole life and pays out a tax-free death benefit when you die.

There are two parts to a UL policy:

  • The death benefit
  • The cash value

The cash value can earn interest and isn’t taxed while it grows. You can use the money in your cash value when you are alive to:

  • Pay the life insurance premiums
  • Withdraw cash
  • Take out a loan

The money you put into a cash value grows and is not taxed until you take it out.

Also known as adjustable life insurance, it is flexible. For example, you can change the amount of your monthly payments and the death benefit. So even if you can’t pay, there will be enough money to pay for it. But it would be best if you waited until it has accrued enough interest before you do this.

But if the investments made with your policy do not make money, you will have to keep paying for your insurance. If you use up all the money in the policy and still do not pay for it, your insurance policy will lapse (expire).

Some people choose UL insurance for their estate. This coverage provides a permanent payout and is used to cover taxes and the cost of leaving money to their legacy.

How much does universal life insurance cost?

Because universal policies have cash value, they cost more to buy. But it is hard to know how much you will pay in premiums before your policy builds up any cash value. The cost of UL insurance is not fixed.

Universal Life Insurance Calculator

Suppose you are considering purchasing a universal life insurance policy. In that case, it can be helpful to use a universal life insurance calculator to estimate the cost and benefits of different coverage options. An insurance calculator considers several factors, such as your age, health status, and desired death benefit amount, to estimate the premiums you can expect to pay and the value of your policy over time. Additionally, many calculators offer a side-by-side comparison of different life insurance policies, including UL, whole life, and term life. This can help you better understand the pros and cons of each option and make an informed decision about which policy is right for you.

Types of universal life insurance 

  • Guaranteed Universal Life Insurance: Guaranteed universal life insurance ensures the minimum amount of growth your policy can achieve each year. This makes it an attractive option for individuals looking for stable growth potential and death benefit protection.
  • Index Universal Life Insurance: Indexed universal life insurance cash value is typically invested in one or more “indexes,” such as the stock market, and will grow based on the performance of those indexes. Policyowners can not lose money due to poor index performance.
  • Variable Universal Life Insurance: The cash value of a variable universal life insurance policy can grow more quickly than that of other permanent life insurance policies, depending on the performance of the subaccount. Policyholders can lose money to subaccount performance.

Universal Life Insurance Pros

For high-net-worth individuals who need an additional tax-deferred savings vehicle, universal life insurance comes with some key advantages:

  • Your whole life, you will have this insurance.
  • You can earn interest that does not dip below 0%.
  • The money that it collects is tax-deferred.
  • You can decrease your monthly payments if you want to do that.
  • Universal Life benefits are paid when the insured dies and the beneficiary files a death claim with the insurance company. The default payout option is a lump sum check.
  • Coverage is designed to last to a specific age. Unlike term insurance, Universal Life can last for your entire life.
  • Your premium payments are customizable throughout the life of the policy. For example, you can lower the premiums or skip them altogether, reducing your cash value or causing the policy to end sooner. Conversely, you can also pay additional premiums to increase the cash value or be able to skip future premiums.
  • Universal Life is generally purchased to achieve a death benefit that lasts your whole life for the least amount of premium, not for cash values.
  • Your beneficiary receives the death benefit income tax-free.

Universal Life Insurance Cons

  • It is more expensive than term life insurance.
  • Cash value growth potential is capped.
  • The cost of the insurance premiums increases as you age.
  • If you use the cash value to pay for premiums, there may be no money left to pay for your insurance coverage, and the policy expires.
  • Plan on having minimal cash values.

What is the disadvantage of universal life insurance?

The main disadvantage of universal life insurance is that it typically has higher premiums than other types of permanent life insurance. This is because universal life insurance policies are designed to last the insured’s entire lifetime, building cash value over time. In addition, universal life insurance policies offer death benefit protection and the potential to accumulate a cash value that can be accessed through policy loans or withdrawals.

Another potential disadvantage of universal life insurance is that it may not provide as much death benefit coverage as other permanent life insurance. This is because the death benefit coverage in a UL policy is typically based on the cash value of the policy rather than a set amount. Therefore, if the policy’s cash value does not keep pace with the death benefit coverage, the death benefit may not be sufficient to cover the needs of the policyholder’s beneficiaries.

Finally, universal life insurance policies may have surrender charges if the policy is surrendered or canceled before the end of the policy term. These charges can eat into the policy’s cash value over time and make it difficult for some policyholders to access it effectively. As a result, individuals considering universal life insurance may want to consider other options that offer greater flexibility and potential cash value growth.

Who should buy universal life insurance?

Universal life insurance products are usually for people with a lot of money or who need to ensure that the government does not take their money. However, it can be good to use this if you have maxed out all your investments and want more money without going into a higher tax bracket.

Many insurance companies offer universal life insurance policies and typically provide quotes through independent brokers. Popular options include John Hancock, Prudential, Nationwide, North American, and Allianz. Click below to get started with your search for a universal life insurance quote. Before selecting a policy, it is important to carefully compare the available quotes and read the fine print of each policy to find the option that best fits your individual needs and financial situation.

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Next Steps

Suppose you are thinking about purchasing a universal life insurance plan. In that case, it is important to carefully compare the options available from other insurance companies to find the best policy that fits your needs and budget. In addition, given universal life insurance’s flexibility, it is essential to carefully review the policy details and speak with an insurance professional if you have any questions or concerns. However, with careful planning and research, a universal policy can be a valuable financial planning tool for individuals seeking long-term protection and potential growth opportunities. Request a quote below.

Universal Life Insurance

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Warning: Applying for life insurance without a medical exam can be risky. If you get declined coverage, it could be at least two years before you can get any life insurance.

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Frequently Asked Questions

A universal life insurance policy is best described as an?

Universal life insurance is a type of permanent life insurance that includes an investment savings element. This type of insurance usually has low premiums.

Who offers the best universal life insurance?

John Hancock, Nationwide, and Prudential offer the best universal life insurance because of their higher maximum coverage levels, low premiums, and A+ (Superior) rating from A.M. Best.

Which is a better whole life or universal life?

There is no clear answer as to which type of life policy is better. For example, whole life insurance offers death benefit protection and the potential to accumulate cash value over time, while universal life insurance policies provide more flexibility regarding premiums and death benefit coverage. Ultimately, the best type of policy for an individual depends on that person’s specific needs and financial situation.

Is universal life insurance a sound investment strategy?

Universal life insurance can be a good investment strategy for individuals looking to grow their cash value over time and access those funds when needed. The policy offers more flexible options for accessing the cash value than other types of permanent insurance, and it typically has higher premiums than different types of life insurance. However, UL may not provide as much death benefit coverage as other types of life insurance. In addition, it may have surrender charges if the policy is surrendered or canceled before the end of the policy term. As a result, individuals considering universal life insurance may want to consider other options that offer greater flexibility and potential cash value growth.

Which riders will pay a death benefit?

Riders that will pay a death benefit include the accelerated death benefit rider, the child rider, and the spousal rider. These riders are designed to provide financial protection for the policyholder’s beneficiaries in the event of the policyholder’s death. The accelerated death benefit rider provides a death benefit to the policyholder’s heirs if the policyholder is diagnosed with a terminal illness. The child rider provides a death benefit to the policyholder’s children in the event of the policyholder’s death. Finally, the spousal rider provides a death benefit to the policyholder’s spouse in the event of the policyholder’s death.

Can a universal life insurance policy be sold?

Yes, a universal policy can be sold. The policies are typically sold through financial advisors or life insurance agents. However, it is essential to note that the cash value may be subject to surrender charges if the policy is surrendered or canceled before the end of the policy term. Other costs may be associated with transferring or selling a universal life insurance policy, such as fees for changing the beneficiary or surrendering the policy. As with any significant financial decision, it is essential to consider all of the costs and benefits of a universal insurance policy before making a purchase decision. Ultimately, the best choice for any individual will depend on their specific financial goals and needs.

Can a universal life policy be paid up?

Yes, a universal life insurance policy can be paid up. This means that the policyholder can make one final lump sum payment to cover their ongoing premiums fully and ensure that the policy remains in force for its full term. For some people, paying up a policy may be an effective strategy for reducing costs or controlling long-term expenses. However, it is essential to note that there may be surrender charges associated with paid-up UL insurance policies, so individuals should consult with a financial advisor or life insurance agent to understand all the costs and benefits before deciding.

What happens if I miss a payment on my universal life insurance policy?

If you miss a payment on your policy, there may be several consequences, depending on your policy’s specific terms and conditions. For example, some policies may allow you to make a one-time “grace period” payment to reinstate your coverage after missing a payment. However, this will typically come with additional costs or fees.

Is universal life insurance cheaper than whole life?

There is no one-size-fits-all answer to this question, as the cost of life insurance depends on many factors, including the death benefit amount, the policy term, and the age and health of the insured individual. However, universal life insurance tends to be more flexible and less expensive than whole life insurance. UL also offers the potential for cash value accumulation, which whole life insurance does not. The best way to compare the costs of different life insurance policies is to work with a financial advisor or insurance agent to get quotes for the specific coverage you need.

What happens to cash value in universal life policy at death?

The cash value and the investment gains stay with the insurance company, and the beneficiaries inherit the death benefit tax-free.

What happens when a universal life insurance policy matures?

When a universal life insurance policy matures, the policyholder will typically have the option to continue their coverage or cancel it. If the policy continues, the premiums will generally increase each year as the insured individual ages. However, if the policy is canceled, the policyholder will receive a refund of any unused premiums minus applicable surrender charges. Additionally, the death benefit of a universal policy will typically remain in force until the policyholder reaches the age of 121. After that, the policy will terminate, and the death benefit will no longer be available.

Can you cash out a universal life insurance policy?

It is possible to cash out a universal life insurance policy, but this will typically come with several fees and surrender charges. For example, you may have to pay back any outstanding premiums or interest accrued on your account and other administrative costs to close the policy. In addition, some policies also include a “surrender charge,” a fee for canceling the policy before its full term. As a result, cashing out a universal life insurance policy is typically only beneficial in certain situations, such as if you need immediate access to cash and don’t have any other options. Therefore, speaking with a financial advisor or life insurance agent is essential to understand the costs and potential benefits before deciding.

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Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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