Universal Life Insurance

Universal life Insurance is a type of permanent life insurance policy that allows policyholders to change their premiums and death benefits. It's also known as adjustable life insurance. For example, a policyholder might want to buy a universal life policy with a relatively low death benefit at the outset, increase it as their family grows and their income rises, and lower it again once their kids are financially independent.

How it works

Universal Life policies can last a lifetime. Policyholders can adjust their premiums and death benefits as their financial situations change. Universal Life policies accumulate cash value that earns interest.

Policyholders can borrow against the cash value or use it to pay premiums. If the cash value depletes, policyholders may need to pay higher premiums to keep the policy active.

Benefits

  • Universal Life policies can provide tax advantages.

  • Beneficiaries typically don't pay federal income taxes on death benefits.

  • Cash value grows tax deferred.

  • Policyholders can access cash value income tax-free if their needs change.

  • Universal Life policies can be used for final expenses, income replacement, debt coverage, and estate liquidity.

Types of Universal Life

Fixed Universal Life: A policy with a fixed interest rate and premium rate

Variable Universal Life: A permanent policy where the cash value accumulation is based on the performance of selected subaccounts

Indexed Universal Life: A permanent policy that combines universal life flexibility with cash value growth based on an equity index

Universal Life Insurance Pros and Cons

Pros

  • Cash value: Universal Life policies can build cash value, which can be used as a safety net or to borrow against.

  • Flexible premiums: Universal Life policies allow you to adjust the amount and timing of your premiums.

  • Lifetime coverage: Universal Life policies provide coverage for the insured's entire life, as long as premiums are paid.

  • Tax advantages: Universal Life policies may offer tax-deferred growth on the cash value component.

  • Death benefit: Universal Life policies provide a death benefit to the beneficiary.

Cons

  • Costly premiums: Universal Life premiums can be higher than other types of life insurance.

  • Fewer guarantees: Universal Life policies have fewer guarantees than whole life policies, such as guaranteed cash value accumulation or lower premiums.

  • Policy cancellation: Universal Life policies may be canceled if premiums are not paid.

  • Policy value varies: The value of a Universal Life policy varies because it's usually tied to the performance of the money market.