Funding Strategies for Universal Life Insurance

Thang Truong
Thang Truong
Updated on:

If you own a universal life policy, you undoubtedly were attracted to the thought of a permanent life insurance policy that builds cash value but was much less expensive than whole life insurance. The way universal life insurance works is that part of the premium goes to fund the death benefit, and part of the premium is invested and creates a cash value account. The strength of the investments is what fund this account. 

>>MORE: Why is Whole Life Insurance Not Worth It?

Flexible Premiums Advantage in Universal Life Insurance

A major selling point of universal life insurance is that it can offer flexible premiums. You can change how often you pay, how much you pay, and eventually you can have the cash value pay the premiums. This flexibility allows you to structure the policy so that you either maximize the cash value or the death benefit, depending on your goals. Different goals, either maximizing cash value or death benefit, can be served by different universal life insurance products. See more details below.

Universal life insurance policies are generally designed in a way so that the cash value account is equal to the death benefits when it matures. At maturity, the insurance company gets the cash value if there’s any left, so either way, it’s ideal if there’s no money in the cash value account when you pass on. 

>>MORE: What Happens When Universal Life Insurance Policy Matures?

Maximizing Cash Value Account with Indexed Universal Life Insurance Policy

If your goal is to use the funds to supplement your retirement income, you should maximize the cash value. The money grows in the account and you can withdraw from it tax-free. In order to do this, early in the policy you should pay as high a premium as you can, beyond what is required to fund the policy, so it can go into the cash value account. 

This strategy allows you to withdraw a certain amount each month, tax-free, to supplement your retirement funds. Just be sure to work with a good advisor who can help you choose and design the right policy, which, if funded properly, will allow you to withdraw from it to support your goals well.

Indexed universal life insurance, or IUL, is designed to help you maximize the cash value account in the policy by benchmarking the interest rate earned with the performance of indexes such as S&P 500. The IUL policy is usually designed in a way that most of the premiums is used to grow the cash value account and a small portion of premium is used to pay for the cost of insurance. As a result, the death benefit in an IUL policy for the retirement income purposes is typically small.

Essentially, the cash value account in a IUL policy performs like an investment account investing in index funds. Even better, this investment account never loses money even if the index has a bad year thanks to the guaranteed floor rate of 0-2%, varying by the insurance companies and their products. It also comes with a cap rate, from 8-12%. In addition, when you withdraw money from the cash value account, as long as the policy is still in force, you never have to pay any income tax.

>>MORE: Understanding Indexed Universal Life Insurance – Why Is It a Good Option for Retirement Savings?

It’s also important not to allow the policy to lapse, so remember to pay the premiums or subtract the amount from the cash value. Keep in mind, cost of insurance goes up as you age, and if you depend on the cash value to pay them, be sure to have the policy is designed in such a way from the beginning.

Maximizing Death Benefit with Guaranteed Universal Life Insurance Policy

If, on the other hand, your goal is to leave a tax-free benefit to your heirs, you should transfer the cash value in the policy to leave a larger death benefit. Usually, if you call your insurance company, you can increase the death benefit for the amount in the cash value account. 

The best policy for this purpose is guaranteed universal life insurance, or GUL. GUL also offers a cash value account in the policy. However, it doesn’t really build much cash value since each dollar of your premiums is utilized to maximize the death benefit that your beneficiary will receive.

>>MORE: Understanding How Guaranteed Universal Life Insurance Works

You’re going to want to fund your policy with the minimum amount possible; just enough to fund the insurance cost for the death benefit you want and keep it in force, if your strategy is to leave a tax-free lump sum for your heirs. 

>>MORE: Compare Whole Life Insurance with Guaranteed Universal Life Insurance

Last Thoughts

Either strategy is acceptable, depending on what your goals are. The main things to remember are not to let the policy lapse, and by the time you die, ideally the cash value should be zero. The insurance company gets to keep that money, so you might as well either withdraw it or put it into the death benefit.

Thang Truong

Thang Truong covers small business insurance and small business success at BravoPolicy. He is a licensed P&C insurance agent. Previously, he held product leadership positions at, Capital One, NerdWallet, and Mulberry Technology. He holds a MBA degree from UC Berkeley - Haas School of Business.

More Stories

6 Best Indexed Universal Life Insurance (IUL) for 2023

Are you looking for a way to set aside some extra money for your senior years, and maybe a little extra for loved ones to inherit? Most people opt for indexed universal life insurance because it offers the greatest cash value growth tied to the performance of S&P 500 index with the least risk thanks […]

Best Self-Directed Roth IRA Companies for 2023

A self-directed Roth IRA is much like a regular Roth IRA, but offers more flexibility as far as what you can invest in. Whereas a regular Roth will only let you invest in stocks, bonds, mutual funds, ETFs, and real-estate investment trusts, a self-directed Roth lets you invest in a greater variety of investment options.  […]

The 5 Best Hybrid Long-Term Care Insurance Companies for 2023

If you’ve decided to plan for every eventuality, you’d be smart to include a plan to cover long-term care. Someone turning 65 this year has an almost 70% chance of needing some type of long-term care, and about 13% of those will need it for five years or more. Long-term care is expensive and can […]

The 3 Best Traditional Long-Term Care Insurance Companies for 2023

Long term care is something that no one likes to think about, but unfortunately, many people will eventually need. Health care costs are skyrocketing, and a lengthy stay at a long-term care facility can easily bankrupt most people’s nest eggs. Long-term care insurance is one way to protect both yourself and your retirement savings. Out […]

The Best Long-Term Care Insurance Companies in California for 2023

California residents who are keen to protect themselves and their families against the worst events in life may be considering long-term care insurance. However, you might not know much about LTC insurance or how it is handled in California. Let’s take a look: What is Long-Term Care Insurance? Long-term care insurance helps pay for long-term […]

The Best Long-Term Care Insurance Companies in Arizona for 2023

Arizona is a great place to retire. It’s warm, there’s no snow to shovel, and Arizona improves the quality of life for anyone with allergies or asthma. When you pack your bags and retire to Arizona, you’re probably not thinking about long-term care. But the sad reality is that 47% of men and 58% of […]

The Best Long-Term Care Insurance Companies in Florida for 2023

There’s a lot of good reasons to retire in Florida. The weather is warm, the beaches are beautiful, and there are lots of other retirees to socialize with. Also, Florida has no state income taxes, no inheritance taxes, and no estate taxes. When you pack up your things and move to Florida, you’re probably not […]

Private Placement Life Insurance: Everything You Need to Know

If you haven’t heard of private placement life insurance, you probably don’t qualify to buy it. Private placement life insurance is typically for investors with millions in liquid cash that they need to invest for tax reasons.  What is Private Placement Life Insurance? Who Qualifies for Private Placement Life Insurance? Benefits of Private Placement Life […]

Nationwide IUL – A Strong Product With Great Features and Excellent Ratings

The Nationwide IUL product can help you either supplement your retirement income or ensure your beneficiaries future by leaving them a nice tax-free death benefit. Obviously, you have many options when it comes to IUL policies, so you want to know how does Nationwide’s policy stack up against the competition? Let’s take a look. Pros […]

Transamerica IUL – A Solid Product but High Consumer Complaint Score & Law Suits

Consumers looking to supplement their retirement income often settle on an indexed life insurance policy. These policies build cash value based on market performance and allow your heirs to enjoy a tax-free death benefit. Let’s take a look at Transamerica’s indexed universal life insurance policy and see what makes it stand apart from other such […]