What Is Universal Life Insurance?

There are a number of reasons that people buy life insurance plans, and the biggest one is to help protect their family in the event that one of the people making money in the family passes away. The loss of an income within the family can make it harder for people to make ends meet, including paying for mortgages and college educations. There are many reasons that people get life insurance plans as well, including to provide financial security for a person’s children. While these are the most common reasons that people get life insurance plans, there are others as well. Some people decide to buy life insurance plans and make the beneficiary a charity organization or other group. In some cases, when there is a cash value on the life insurance policy selected, life insurance plans are utilized to save for retirement. The cash value in some permanent life insurance policies, which universal life insurance is, will grow tax-deferred. This money can be borrowed at a later date, providing a cash savings vehicle built into the policy.

Cash value policies can be attractive investments for some people, but for many, it is more cost-effective to get a different type of life insurance plan. The decision as to whether or not you decide to buy a universal life insurance plan is dependent on your financial situation, as well as your financial goals. By determining the purpose of the life insurance policy you are looking to purchase, as well as the amount of protection you want to get, you will be well on your way to getting a plan that suits your needs best. The tools on this website can help you get the best prices for life insurance available, and with free quotes, you can get a top universal life insurance policy.

What Is Universal Life Insurance?

A universal life insurance plan offers people lifelong coverage, as well as flexibility, which are benefits that not all life insurance policies offer. Having flexibility in terms of paying for premiums, as well as different choices to how the cash value of the policy is invested, universal life insurance policies can be a good choice for many people. Standard universal life insurance policies see their cash value grow based on the performance of an insurance company's portfolio. The cash value can be used to pay for premiums in many cases. Universal life insurance plans also have variations, which include variable and indexed universal life coverage. Often compared to whole life insurance, universal life insurance offers coverage for a person’s entire life. It is often less expensive than some of the other options available, while also offering more options overall.

How Does Universal Life Insurance Work?

People purchasing life insurance plans should not only know what kind of life insurance they want to purchase but also how that type of life insurance policy works. Universal life insurance is permanent life insurance. This means coverage can last for the entirety of a person’s life, as long as they continue to make premium payments. There is separate insurance available that is not permanent insurance, called term life insurance. Term life insurance only provides insurance coverage for a pre-set period. In most cases, term life insurance policies are active for 10 to 20 years, then the pricing is reevaluated, and the policyholder can choose to continue getting insurance coverage or not. Each term sees the price of the policy go up.

Universal life insurance is available for individuals but is also offered by employers as group universal life insurance in many cases.

There is a cash value component universal life insurance, and this is separate from the death benefit listed in the policy. The death benefit of a policy, also called the face value, is what the listed beneficiaries will receive upon the insured person’s death. As long as premiums are paid on the policy, the face value of the policy will not change. In some cases, a person can stop paying for their premiums and receive a lower death benefit, like with reduced paid-up insurance. Some policies offer reduced paid-up features built-in, but not all do.

There is a second element of universal life insurance that people need to be aware of. This is the cash value component. Every time a person makes a premium payment to their universal life insurance plan, part of their premium is put towards the cost of insurance, including covering the death benefit and paying for administrative fees. The rest of the payment becomes part of the cash value on a policy. The cash value is guaranteed to grow according to the minimum annual interest rate listed on the policy. It can also grow faster, dependent on the performance of the insurance company's investments.

How Can Universal Life Insurance Cash Value Be Used

There are three ways that the universal life insurance plans cash value can be utilized. The first of these is called the surrender value. If a person decides that they no longer want a life insurance plan, they can give it back to the insurance company. This is called surrendering the policy. The insurance provider will give you the cash value in return for your policies surrender.

The second way the cash value of a universal life insurance policy can be used is called loan collateral. It is possible to borrow money from your insurance provider and use the cash value of your policy as collateral for the loan. Due to the cash value of the loan being used for collateral, that amount is also the maximum amount you can borrow from the policy. Policy loans are subject to interest rates, which is important to keep in mind. The interest rates are set by the insurance carrier.

The other way that universal life insurance plans cash value can be utilized is for premium payments. The cash value can be used to pay for a portion of a person’s life insurance policy, or in some cases, can be used to pay for premium in its entirety. Remember that policies will lapse if the cash value drops to zero, so you do need to pay attention to the amount of money that is in your account to avoid this.

Types of Universal Life Insurance

There are multiple different types of universal life insurance plans. The policies themselves can seem pretty complicated, but once you are aware of there being three different policies to choose from, it becomes easier to understand.

Indexed Universal Life Insurance

With this type of universal life insurance plan, the investments of the cash value in your policy are put into indexes. Indexes are part of the stock market and include things like the S&P 500, NASDAQ, the Dow Jones Industrial Average, and others. Your policy will be attached to one of these indexes. Keep in mind that the rate you will get will be a little bit less than the performance of the index. This is because the insurance company takes some of the earnings. Also, there can be more risk to indexed universal life insurance because, in some cases, your cash value can drop. This can happen when the market is not doing well. Your premiums can be impacted in good ways in some cases and not as good ways in others.

Guaranteed Universal Life Insurance

This is an option for people who do not want their life insurance premiums to be affected by market performance. With a guaranteed universal life coverage plan, your premiums will stay the same for the course of the policy. The benefit is that you will know what to budget in order to make payments. With these types of plans, the interest rates are set when the policy is created. As long as you send in payment for your premium, you will have coverage for the rest of your life. This policy is considered the least risky universal life insurance plan.

Variable Universal Life Insurance

With a variable universal life insurance plan, how the cash value is invested is different from both guaranteed universal life insurance and indexed universal life insurance. Instead of investing in an index, or having an interest rate set when the policy is first purchased, the cash value is invested into a mutual fund. A team of investment pros manages mutual funds, which can be a good way to invest because the risk is diversified. While many people do well with variable universal life insurance plans, keep in mind that there are larger fees that can take a bite out of the earnings accrued. Each type of policy has pros and cons to it.

There are many benefits to life insurance, and universal life insurance is the best policy for many people. After you evaluate your needs, use the tools here to get the best prices for life insurance available for the best companies. Protecting your family’s financial future is important, and a life insurance plan is an important part of making this happen.