Universal Life (UL) Insurance

Universal life (UL) insurance is permanent life insurance (lasting the insured's lifetime) with an investment savings component and low premiums similar to term life insurance. The majority of UL insurance policies include a flexible-premium option. However, some require a single premium (a lump sum payment) or fixed premiums (scheduled fixed premiums).

How Universal Life (UL) Insurance Works

A UL insurance policy is more adaptable than whole life insurance. Policyholders have the ability to modify their premiums and death benefits. UL insurance premiums are made up of two parts: the cost of insurance (COI) and a saving component known as the cash value.

The COI, as the name implies, is the bare minimum of premium payments required to keep the policy active. It consists of several items rolled into a single payment. COI includes charges for mortality, policy administration, and other expenses directly related to maintaining the policy in force. COI varies by policy and is determined by the policyholder's age, insurability, and insured risk amount.

Premiums collected in excess of the cost of UL insurance accumulate in the policy's cash value. As the insured grows older, the cost of insurance rises. The accumulated cash value, if sufficient, will cover the increases in the COI.

Advantages and Disadvantages of Universal Life (UL) Insurance

A UL insurance policy, like a savings account, can accumulate cash value. The cash value of a UL insurance policy earns interest based on the current market or minimum interest rate, whichever is greater. Policyholders may access a portion of the cash value as it accumulates without affecting the guaranteed death benefit. The withdrawals, however, will be taxed.

Furthermore, earnings will be available as either last in, first out (LIFO) or first in, first out (FIFO) funds, depending on when the policy and premium payments are made. When the insured dies, the insurance company keeps any remaining cash value, with beneficiaries receiving only the death benefit.

Universal life policyholders can borrow against their accumulated cash value without incurring any tax consequences. If they do, however, interest will be calculated on the loan amount and a cash surrender fee will be charged. Unpaid loans reduce the death benefit by the amount owed, with unpaid interest deducted from the remaining cash value.

In contrast to whole life insurance policies, which have fixed premiums for the duration of the policy, UL insurance policies can have variable premiums. Policyholders can make payments in excess of the COI. The excess premium is added to the cash value and compounded. If there is sufficient cash value, policyholders may skip payments without risk of policy lapse.

Having said that, policyholders must be aware of the rising cost of insurance as they age. Depending on the credited interest, there may not be enough cash value to keep the policy in force, necessitating higher premium payments. Missed payments must be made within a certain time frame in order for the policy to remain in effect.

Universal Life Insurance vs. Term Life Insurance vs. Whole Life insurance

Universal life, a type of permanent life insurance, offers policyholders premium flexibility, a cash savings component, and a death benefit. Premium costs may vary depending on interest rates and the age of the policyholder.

You can borrow against or cash in the savings portion of universal life insurance, which grows tax-deferred over your lifetime. Term life insurance provides coverage for a set number of years, usually 20 or 30, and expires when the term is up. Term life insurance is typically inexpensive, with low premiums; however, there is no cash component to borrow from or cash in, and the death benefit is null and void if you die before the term is up.

Whole life insurance is a type of permanent life insurance that includes a cash value savings component. Another significant distinction between universal and whole life insurance is that universal life insurance allows you to invest your policy's cash value account in a variety of ways. Whole life insurance premiums are fixed for the duration of the policy, whereas universal premiums vary.

What Is Universal Life Insurance and How Does It Work?

UL policies are a type of permanent life insurance with adjustable premiums. In contrast to term life insurance, you can accumulate interest-bearing funds like a savings account. In addition, policyholders can change their premiums and death benefits, and those who pay more toward their premium receive interest on the excess.

What Is the Disadvantage of Universal Life Insurance?

One significant disadvantage is that holders must keep an eye on fees. They will be taxed on cash withdrawals and charged interest on loans. Holders should also keep an eye on rising premiums as they age, because there's a chance that not enough cash will be available to keep the policy active, forcing the holder to pay higher premiums.

Which Is Better Whole Life or Universal?

Whole life and universal life are both types of permanent life insurance that offer a cash value savings component that policyholders can borrow from or cash out. Whole life insurance has fixed premiums, whereas universal premiums are flexible and may increase as you age. Depending on the amount of coverage and flexibility you require in a permanent policy, either form may be a good option for you.

What Is the Difference Between Universal Life Insurance and Whole Life Insurance?

Whole life insurance is more stable because the death benefit will never decrease if you pay our fixed monthly premiums. Although universal life insurance provides greater flexibility, your death benefit is not guaranteed. The benefit will be reduced if you borrow too much against the policy, but you can design your coverage to last for many years or your entire life. You can change your death benefit and the amount you pay in premiums.

Can I Cash Out My Universal Life Insurance Policy?

You have the option of selling your universal life insurance policy or liquidating the cash value component and canceling the policy, but you will be charged a surrender fee.