Universal Life Insurance

Universal life (UL) insurance is permanent life insurance (lasting the lifetime of the insured) that has an investment savings element and low premiums similar to those of term life insurance.

Universal life (UL) insurance is permanent life insurance (lasting the lifetime of the insured) that has an investment savings element and low premiums similar to those of term life insurance. Most UL insurance policies contain a flexible-premium option. However, some require a single premium (single lump-sum premium) or fixed premiums (scheduled fixed premiums). A UL insurance option provides more flexibility than whole life insurance. Policyholders can adjust their premiums and death benefits. UL insurance premiums consist of two components: a cost of insurance (COI) amount and a saving component, known as the cash value.

Universal life insurance is a type of permanent life insurance. Unlike term life insurance, which is meant for a specific period, such as 20 years, universal life insurance is in effect for the rest of your life (unless you stop making premium payments). Some forms of universal life insurance also offer a cash value component. You can take money out of cash value via a withdrawal or loan. When you die, the insurance company will reduce the death benefit payout to your beneficiaries by the amount of any withdrawals or outstanding loans. But for some buyers, accessing cash value is more important than a full payout to beneficiaries later on. There are a few types of universal life insurance policies and it’s crucial to understand what you’re buying. Their costs and features are quite different.

Withdraw Money or Borrow Against It
When you pay your premium on a universal life insurance policy, a portion of each payment goes toward paying for the death benefit. Another portion also goes to building up the policy’s cash value. Over time, after money has accumulated, you may be able to withdraw or borrow against the cash value of the policy (the available amount will vary by company)

Earn Interest on Your Policy’s Cash Value
The cash value of a universal life policy generally earns interest that’s in line with current money market rates, says the Insurance Information Institute (III). Of course, it’s important to note that the interest rate will fluctuate along with the market, which means the interest you receive may also go down. But, some companies offer protection against that with a minimum performance guarantee on the policy.

Flexibility With Premiums
If the cash value of your account can cover the costs, you may have the ability to lower or stop paying your premiums on a universal life policy for a certain amount of time, the III says. This can be helpful if money becomes tight and you’re looking for ways to lower monthly bills. But, there can be negative consequences, too, says the III. For instance, your coverage may end if you use up the account’s cash value to pay for premiums.

Keep in mind that even though your premiums are flexible, you must maintain a positive cash value, otherwise your policy will lapse (meaning you no longer have coverage). Your insurer may offer a grace period—a specified amount of time in which you have to make a payment to restore your policy to a positive cash value status before coverage lapses. Read your policy or check with your insurance provider for more information.

Adjust the Policy’s Death Benefit
The flexibility of a universal life policy also extends to the death benefit. At some point, you may want to increase the amount that’s paid out upon your death. This is something some insurance companies allow, as long as you pass a medical exam, says the III2,3. Likewise, you might choose to reduce the death benefit, to reduce the cost of the policy. Remember that if you increase the policy’s death benefit, it may increase the premium you pay.