Universal Life Insurance

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Life insurance is an important resource as you build out a long-term financial strategy for you and your family. It provides your family with a monetary death benefit in the event you pass away.

There are many types of policies that are designed for a variety of situations. Universal life insurance is one of the most flexible options that can provide financial support during your lifetime as well.

What is universal life insurance?

With a universal life insurance policy, you make premium payments in exchange for a set death benefit. As you pay your premium over time, part of the money goes into an account that accumulates a cash value while earning interest.

In other words, a universal life insurance policy also acts as a savings account. As the cash value grows, you can opt for a lower premium payment using the savings to make up the difference.

How does universal life insurance work?

Universal life is structured to have two distinct components. Part of your premium payment goes to the insurer, contributing to your death benefit and administrative costs. Another part goes into a savings vehicle that earns some type of interest. You have a few options of what to do with that money as time goes on.

Cover your premiums

One option is to use the money to cover your premium payments, rather than paying out-of-pocket. Some people appreciate this flexibility in case they hit a financial roadblock down the road.

Borrow from the savings account

You can also withdraw or borrow money from the savings account. Each insurance company has rules about how much you can borrow and what happens to your death benefit (in some cases, it may be reduced). Also, check to see if you’ll owe any taxes before dipping into your universal life policy.

Be careful that you don’t drain your account completely, which could cause your policy to lapse — meaning your beneficiaries wouldn’t receive a death benefit even if you’ve held a universal life insurance policy for years.

Types of universal life insurance

While the overall concept of universal life insurance is much more flexible compared to a term life policy, there are a few different types you can choose from depending on your goals and financial situation.

Indexed universal life policies

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.

Obviously, this is a riskier option because you don’t have a fixed interest rate and your account value can drop.

Guaranteed universal life policies

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’s also not a volatile one.

Variable universal life policies

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 one as well.

Is universal life insurance worth it?

One of the benefits of getting a universal life insurance 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. But it’s always smart to talk to a financial advisor and compare all savings vehicles before making a decision.

Frequently asked questions

What are the disadvantages of universal life insurance?

Universal life insurance typically comes with higher premium payments compared to a term life option. Also, you’ll likely have to pay administrative fees for the cash value component. The cash in your savings vehicle can fluctuate, particularly if it’s tied to an index or mutual fund. That can cause your premium to increase, putting a greater financial strain on your wallet.

What is the difference between whole and universal life insurance?

Both are types of permanent life insurance, so your policy doesn’t expire because you hit a certain age. The main difference is how the cash value portion of the account is handled. With whole life insurance, your premium is fixed. With universal, your premium can change if you opt to pay for it with your accumulated cash value.

Because the value of your cash savings can change, your premium payment can jump up if your cash value goes down or you borrow money from it.

Why should you buy universal life insurance?

Universal life insurance may be a good choice if you want that permanent coverage. Term life, for example, is ideal if you only want the death benefit for a certain period of your life, such as when your kids or young or you have a large mortgage.

If you want your beneficiaries to receive a death benefit even if you pass at an old age, universal life could be a more affordable option to get that coverage without it ever expiring.

Should you cash out your universal life insurance policy?

It’s typically best to only cash out 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, find out what happens to your death benefit. Oftentimes, your death benefit is reduced if you take money out of your savings vehicle.