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- Universal life insurance is a type of permanent life insurance policy that offers a cash value account and flexible options.
- There are three types of universal life insurance policies: indexed, variable and guaranteed.
- Universal life insurance can be more expensive than some other types of life insurance.
Life insurance is an important financial strategy for many Americans, providing a monetary benefit to your beneficiaries in the event of your death. This payout can cover anything you need it to, including end-of-life expenses and funeral costs. But there are so many types of life insurance policies available that provide a variety of coverage options for temporary or permanent needs. So what if you want a permanent life insurance policy that offers some flexibility and an opportunity to invest money? If that’s what you’re looking for, universal life insurance could be a good choice. Bankrate’s insurance editorial team explains what universal life insurance is and how it works so you can make an informed decision about whether it’s right for you.
What is universal life insurance?
Universal life insurance is a type of permanent life insurance, meaning that, as long as you pay your premiums, it will last until your death in most circumstances. Permanent life insurance is structured to have two distinct components:
- Death benefit: Part of your premium goes towards the amount of money that your beneficiaries will receive upon your death, which is called the death benefit.
- Cash value: Another part of your premium goes into a savings vehicle, called the cash value account, that earns interest over time. Once the cash value account has accrued enough money, you’ll have the option to borrow money from it or use it to pay premiums. Keep in mind that taking money from your cash value account will reduce your death benefit in many cases. And if your cash value account runs out of money, your life insurance policy could lapse.
Universal life insurance differs from other types of permanent life insurance in that it offers greater flexibility. You may have the option to raise your death benefit or use your cash value account to lower your premium payments. Additionally, the cash value portion of your universal life insurance policy works a bit differently from other types of permanent insurance.
What are the different types of universal life insurance?
While the overall concept of universal life insurance is much more flexible compared to a term life policy and even other permanent policies, there are a few different types of universal life insurance you can choose from depending on your goals and financial situation.
An indexed universal life policy is tied to a market index. That means the savings portion of your account will fluctuate based on the performance of the stock market. Your insurance company will also likely take off an additional administrative fee for managing your account.
This option comes with more risk because you don’t have a fixed interest rate and your account value can drop.
Variable universal life is similar to an indexed policy, except that you can diversify your investments through money market accounts. There’s still a level of risk because there’s no way to predict how the stock market will perform, even with your funds diversified.
Like an indexed universal life policy, you’ll be charged administrative fees with this type of policy as well.
This is a low-risk option with a fixed premium for your entire life. Your account won’t grow significantly in terms of cash value, but you’ll have a consistent premium that doesn’t change based on the stock market.
It’s not a growth-oriented type of universal life insurance policy, but it also doesn’t have the volatility of other universal life policies.
What are the pros and cons of universal life insurance?
Like any life insurance policy, universal life insurance comes with some pros and cons. These factors could help you decide whether universal life insurance is something you want to explore further.
|Builds cash value that can be used to pay premiums or borrow money
|Some monitoring is required so you can ensure your investments are performing as desired and your cash value account is not being drained (if using to pay premiums)
|Offers more flexibility than other permanent policy types; policyholders can adjust death benefits and premiums throughout the life of the policy.
|Building cash value takes time; if you are looking for a fast investment opportunity, this policy type is probably not right for you
|Different universal life policy types offer different investment options, depending on your appetite for risk and desired growth
|Increasing the death benefit could require you to take another medical exam, which could trigger an event greater premium increase
Is universal life insurance worth it?
One of the benefits of getting a universal life insurance policy (or any type of permanent policy) is that your death benefit remains valid as long as you keep up with your premiums. This is different from term life insurance, which only lasts between five and 30 years, depending on your policy. If you want a policy that sticks with you as you get older, universal life is a good option.
You may also be attracted to the cash value component of universal life insurance and the great flexibility it offers on both premium payments and the value of your death benefit.
But because of the flexibility universal life insurance offers, it is likely to be more expensive than many other types of life insurance.
It may be smart to talk with a certified financial planner and research all your savings and investment options before making a decision about what works for you.
Learn more: Average cost of life insurance
Frequently asked questions
Life insurance is a highly personalized insurance product, so there is not one company that will be the best for everyone. When looking for the best life insurance for you, consider your needs. What are you trying to accomplish with your life insurance policy? What is your age and medical status? Once you determine what you need, do a little research to see which life insurance companies offer policies that fit those needs. Collect quotes for the policies that interest you and see what works best for your situation.
While both whole and universal life insurance are permanent life insurance policies, there are some key differences. Whole life insurance offers a fixed premium and a fixed death benefit for the duration of the policy. These policies will build cash value over time, though slowly, while a universal policy’s cash value could grow faster, depending on your investments. A universal life insurance plan can also have a premium that fluctuates based on its cash value and your shifting death benefit needs. Universal plans are known as being generally higher-risk and higher-reward than whole life insurance plans.
It’s typically best to only surrender your universal life insurance policy if you’re in the midst of a major financial emergency. If you do, make sure you understand any tax implications, especially if your contributions were made in a tax-advantaged account. In some cases, any withdrawals may result in higher tax payment.
Also keep in mind that surrendering your cash value means that your policy will effectively be canceled and your beneficiaries will no longer receive a death benefit.