Universal Life Insurance
Like whole life insurance, universal life insurance is another form of coverage that lets you invest money within your life insurance policy. If you’re looking for more affordable coverage that allows for flexibility, and has a savings plan built into it, universal life insurance might be a great option for your life insurance needs.
One major difference with universal life insurance (sometimes referred to as UL) is that it offers a lot of flexibility with its premiums. You can choose to pay the least amount for your premium, and it will keep your policy active, or you can choose to pay more on any given month, and the extra cash will go towards your cash value—where it will have the opportunity to accrue interest over time.
How does universal life insurance work?
Universal life insurance consists of a policy with a premium that the insured individual pays in order to keep the policy alive.
Premium costs can change over the course of your universal life insurance policy’s duration, which could be a positive thing for some who choose to pay more than their premium—the extra payments will be added to the cash value of your policy, and have the opportunity to accumulate interest.
The premiums that you’re paying in order to keep your universal life insurance policy consist of two components:
- The cost of insurance (COI)
- The cash value
Understanding these costs will give you a clear picture of how universal life insurance works, and help you understand if it’s the right life insurance policy for you.
The cost of insurance
The cost of insurance, refers to the cost of a bundle of services which your universal life insurance policy helps cover once you pass. This is mostly made of administration fees and other costs associated with keeping your policy going.
This COI varies depending on the policyholder’s age, insurability, and total risk assessment. This means, if you’re a younger person with less of a chance of reaping the benefits of your universal life insurance policy right away, you might end up getting a lower premium from your insurer.
The cash value
The cash value, another portion that you’re paying through a premium, is the savings aspect of the universal life insurance policy.
This part of your payments will have the opportunity to accumulate interest. You can also choose to pay more than your COI, and that superfluous cash will go towards the cash value of your universal life insurance.
As policyholders can with whole life insurance, you can take out withdrawals of the accrued savings of your universal life insurance policy. You can do so without affecting the death benefit that is guaranteed to your benefactor, as long as you pay it back.
Keep in mind that if you withdraw from the excess cash attached to your policy, you will pay taxes on the money you withdraw. As the universal life insurance policyholder, you can take out cash without paying taxes, but interest will be calculated on what you took out. If you do not pay back money you take out on your policy, it may affect the death benefit your beneficiary receives at your passing.
In the case of universal life insurance, the cash value is not received by the beneficiary along with the death benefit. Remaining cash left attached to the policy, will go to the insurance company, not the beneficiaries.
How is universal life insurance different from other life insurance policies?
Universal life insurance has both similarities and differences with the major types of life insurance policies. Much like whole life insurance, it has a savings element that allows your cash to earn interest, making it similar to an investment or high-interest savings account. Unlike whole life insurance, it has cheaper premiums that are more flexible, so the policyholder will have the ability to make changes to the plan throughout their life.
Similar to term life insurance, universal life insurance premiums tend to be lower, as they have more restrictions than whole life insurance. Universal life insurance will likely still be more expensive than term coverage, but it has the added benefit of the built-in savings plan that allows you to store cash and allow for growth.
Universal life insurance policyholders can skip premium payments if their cash value has grown enough to cover those payments. The universal life insurance policy will remain intact and won’t be affected, because the premium cost will be taken out of your saved up cash.
Beneficiaries will receive a guaranteed death benefit when the policyholder dies, much like with any other life insurance (as long as the premium payments are always made), but the cash value accrued during the policy holder’s lifetime will be given back to the insurance companies.
Who buys universal life insurance?
Those who choose universal life insurance generally buy this kind of permanent coverage both for the death benefit and for the contract’s ability to accumulate cash value. In that way, it’s partly considered a savings vehicle, but still is mostly purchased to provide coverage.
Flexible premiums are also a large aspect to consider when weighing the pros and cons of universal life insurance against other types of coverage. If you’re tight on cash one month, you can pay less than usual; when you’ve got a little extra money after budgeting, you can put it towards your cash value and watch your savings grow.
Some policy holders may find that the built-in savings element included in their premium is helpful for saving and investing overall. If traditional saving isn’t your forte, or investing in the stock market seems too daunting, a universal life insurance policy might be a safe way to dip your toes in the financial waters.
Universal life insurance quotes
If you have decided you like the built-in savings element of universal health insurance and the flexibility with premiums, you can start shopping and comparing different universal life insurance policies from trusted companies all in one place.
Use our life insurance comparison tool to find the universal life insurance policy that works best for you and your loved ones.