Universal life insurance offers permanent coverage to many people who are looking for a plan that lasts their entire lives and that the payment remains fixed as well.
Most people looking for life insurance will have to decide between term (temporary) life insurance and permanent life insurance. While term insurance is straightforward, permanent life insurance has several alternatives, each offering a different way to accumulate money.
One of the popular varieties of permanent insurance is universal life insurance. While the cash value offered by the policy provides flexibility, it can be confusing and more expensive than consumers need.
What is universal life insurance?
What sets universal life insurance apart from other types of permanent life insurance is that it allows you to use cash value to pay your premiums. But like other permanent policies, it lasts your entire life and pays a tax-free death benefit to your beneficiaries when you die.
Part of the premiums you pay go toward the death benefit, while the rest is contributed to the cash value of your policy, which earns a small amount of variable interest and isn’t taxed as it grows. While you are alive, you can use the cash value to:
- Pay your policy premiums
- Withdraw cash, but with additional charges
- Take out a loan, which you will have to repay with interest
While the cash value grows tax-deferred, withdrawals are taxed as income.
Universal Life Insurance Definition
Universal life insurance is a type of permanent life insurance that contains an investment savings component like whole life insurance, but with lower premiums similar to term life insurance.
Universal life insurance policies generally have flexible premium payment options . This flexibility differentiates universal life insurance from term life and whole life insurance.
What You Should Know About Universal Life Insurance A big advantage to choosing universal life insurance is its flexibility, which allows you to decide how much you pay each year by accessing the policy’s cash value. Keep in mind that you will have to pay the minimum amount of the policy or else it will lapse.
Knowing the potential cash value of your Universal Life policy can allow you to use this money to skip a payment or leave it to accumulate cash value over time. Policy growth will vary depending on the specifics of your policy and various other factors.
The insurance provider you choose for your policy will provide you with a minimum crediting rate that will be detailed in your contract. That said, if the company earns more than the minimum interest rate, it may put the additional interest on your policy.
This is why universal life policies have the ability to earn more than whole life policies over time.
Is universal life insurance a good option?
A universal life insurance policy could be a good option if you are looking for the following:
- The flexibility to adjust premiums and coverage amounts.
- If you may need a cash value loan while you are alive.
- You need permanent life insurance protection and access to cash values.
Universal life insurance offers buyers:
- Flexible life insurance premium.
- An increasing level or benefit of death
- The insured gets a tax-deferred investment opportunity.
In addition, you may also pay additional premiums to your UL policy . This is called overfunding a policy and you would be adding money to the policy and building up its cash value. Over time, the cash value will earn interest with which you can borrow or contribute to the cost of the policy later.
The cash value account can earn fixed interest or be credited with earnings based on world indices. As long as the cash value exists, you may be able to skip payments for several months , a year, or even longer. In addition, the Universal Life policy can provide coverage for a lifetime if the cash value is able to sustain the cost of the insurance.
Different types of universal life insurance
There are 3 types of universal life insurance. Let’s see how they differ.
Guaranteed Universal Life Insurance
A guaranteed universal life insurance policy is the “ Best of Both Worlds ” type of policy.
It is nicknamed “ Lifetime Term ” because it has the ability to provide you with lifetime coverage at prices similar to term insurance. This policy is permanent coverage, so it is not term life insurance, but it is not whole life insurance either.
Guaranteed Universal Life insurance (GUL) has been created to last your whole life . Rates are guaranteed to never increase as long as you pay the premium and your death benefit will always be active. A guaranteed universal life insurance policy is much like a term life policy if the term insurance could last your entire life.
Remember, with Term Life, you must select a 10, 20, or 30 year term of coverage. With a GUL, your rates are not attached to a specific number of years like term insurance, but are instead priced for specific ages like 90, 100, or even up to 121. The older you are, the higher the monthly premium and there is also a higher chance that the death benefit will pay out .
This GUL policy has become very popular recently . You can save a great deal of money, especially if you are over 60 years of age.
Guaranteed Universal Life Insurance Pros and Cons
Pros of Guaranteed Universal Life Insurance
- Lifetime premium level.
- The interest rate does not affect premium payments
- Low-Cost Permanent Coverage Option
Cons of Guaranteed Universal Life Insurance
- It should not be used for cash value if that is one of your goals.
- It is not as cheap as term life insurance.
- Missing premium payments can jeopardize the policy.
Indexed Universal Life Insurance
Indexed Universal Life insurance is a fixed policy that is good for someone who does not have a problem with their returns being attached to the stock index. You are protected with indexed universal life insurance. Your money is always protected, while the upside can have great upside potential. Keep in mind that your interest will fluctuate with the specific rate to which your policy is attached.
Indexed Universal Life Insurance Pros and Cons
Pros of Indexed Universal Life Insurance
- Lifetime Protection
- flexible policy
- cash value
Cons of Indexed Universal Life Insurance
- Assumptions incorporated in the policy
- CAP interest
- Insurance expenses can change cap
Variable Universal Life Insurance
If you want to manage your mutual funds , a Variable Universal Life (VUL) policy might be a good option. You will use the accumulated cash value from your VUL policy and have separate accounts. Variable Universal Life insurance is a permanent life insurance policy. The performance of VUL will depend on the overall performance of your mutual funds .
During certain months, you may not have to pay your premium at all, while other months you may have to pay the maximum amount allowed by the IRS. This policy is not recommended for most life insurance buyers unless you remain active and plan to frequently monitor your policy’s performance.
Pros and cons of variable universal life insurance
Pros of Variable Universal Life Insurance
- Premium Flexibility
- death benefit
- No Interest Cap
- Cash Value Tax Advantages
- Policy Loans
Cons of Variable Universal Life Insurance
- Risky
- premium cost
- Difficult to understand and manage
- Premiums May Increase
Differences between Universal Life Insurance and Guaranteed Universal Life
In this section, we will discuss the difference between universal life and guaranteed universal life, which is an excellent alternative to whole life.
Traditional Universal Life Insurance:
- This policy can offer coverage for your whole life.
- Offer flexible premiums
- It generates cash value that may be available for loans or withdrawals.
- Some clients will borrow or withdraw cash value funds as a supplemental retirement income.
- If the premium is not paid and there is no cash value to cover the cost of the insurance, the policy will be cancelled.
We generally do not recommend a traditional universal life insurance policy.
If you are looking for direct life insurance coverage for your whole life, a guaranteed universal life insurance policy is the best option.
Guaranteed Universal Life Insurance:
- This policy can offer coverage for your whole life.
- It offers flexible premiums, but it must be paid on time or you risk cancellation.
- There is little or no cash value for loans or withdrawals.
- There is an additional feature called No Lapse that ensures that the policy will not be canceled even if the cash value is zero as long as payments are made.
- Less expensive than traditional universal life insurance.
The Difference Between Universal Life and Whole Life Insurance
While Universal Life insurance offers lifetime protection and is somewhat similar to whole life, there are also many differences. Let’s compare universal life insurance with whole life.
Universal Life Insurance vs. Whole Life
Two of the biggest differences are: Premium Flexibility and Guaranteed Lifetime Coverage . With Universal Life insurance, if you miss or miss a payment, the insurance amount is taken from your cash value. This standard life insurance policy can provide coverage up to 100 years, but there is no guarantee.
Most of the policy’s performance is due to the amount of interest the cash value earns over the life of the policy and whether you have borrowed or withdrawn funds from the policy during its life.
With Whole Life, if you miss or miss a payment , the cost is borrowed from your cash value and set up as a loan.
If you pay your premiums, you are guaranteed coverage for your entire life as long as you don’t borrow or withdraw funds from the policy.
What whole life insurance offers:
- May provide lifetime coverage
- Cash value that you can withdraw or borrow.
- Clients can borrow or withdraw cash value as supplemental retirement income.
- If premiums are not paid, the policy will be canceled if there is no cash value to pay the cost.
What Guaranteed Universal Life Insurance offers:
- There may be lifetime coverage
- Inflexible Premiums – Premiums usually need to be made on time or your policy could be cancelled.
- There is little or no cash value available for withdrawals or loans.
- Your “No Lapse” option is an addendum to the policy that guarantees that the policy will not be canceled if the cash value is zero, but the policy still needs to be paid.
- It is generally less expensive than whole life.
With the standard Universal Life policy, if your cash value drops too low, your policy can be canceled and you will lose all your money. Choose Guaranteed Universal Life insurance because it offers guaranteed premiums for life , which means that as long as you pay your premiums, your policy cannot be cancelled. Guaranteed Universal Life insurance works like Term, except that it is for your whole life.
The Difference between Universal Life and Term Life insurance:
The biggest difference between these two policies is that Term Life insurance only lasts for the length of your term.
In other words, your coverage will provide protection for only 10, 20, or 30 years , depending on the term you select. Universal is a permanent policy that will cover you throughout your life.
You can apply the same estimated amount to your premium as with term, but instead of having it available for only 10, 20, or 30 years, you pay a standard price until you reach 100. Term Life does not provide cash value, so if you cancel the policy, nothing will be returned to you.
The 3 Main Components of Universal Life Insurance
Death Benefits:
When deciding how you want your death benefits paid to your beneficiary, you are given two main options:
The Type A Death Benefit or the Level Death Benefit. You can choose the level of death benefit you want and it starts as a set amount that stays “level” throughout the life of the policy, regardless of cash value.
The Type B Death Benefit is another option that combines a specific death benefit along with a cash value accumulation feature that will continue to build throughout the life of the policy.
Credited Interest Plan for Cash Accumulation:
The insurance provider allocates a portion of your premium to the interest credited plan of your choice. Equity-indexed universal life insurance will allow you to be active in gains through the leading stock index with no risk for leading loss.
This is often a very attractive retirement plan option for some buyers. You are guaranteed a fixed rate of return regardless of how the market performs. If the market outperforms the minimum interest amount, you will receive a good share of the profits possibly capped at a certain percentage
Flexible Premiums:
The flexibility of paying your life insurance premiums is one of the biggest differences between whole life and universal life. Universal premiums can be paid as the insurer wishes as long as there is enough cash value to pay the cost of the insurance. Unfortunately, you cannot change the whole life premium to suit your financial needs.