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What Is Universal Life Insurance? And Its Pros and Cons?

Life insurance can be a great product for offering you peace of mind. On a general level, paying premiums into a life insurance plan can mean a payment (called a death benefit) is paid out to your family after your passing. However, there are several different types of life insurance to consider. One example is universal life insurance. Below we’ll answer the question of “what is universal life insurance?” We’ll cover what it is and how much it costs.

What Is Universal Life Insurance? 

Universal life insurance is a type of permanent life insurance, meaning that you are covered for your whole life as the insured.  

You just have to keep up on your premium payments and meet possible other requirements to keep your policy in force. You designate who your beneficiaries are and a death benefit is paid to them when you pass away.

The main difference between universal life insurance and whole life insurance, another type of permanent life insurance, are the following:

  • Universal life insurance provides greater flexibilities to manage the cash value component of the policy.
  • It also enables consumers to use life insurance for different purposes from maximizing coverage amount to maximizing retirement income from the cash value account, or maximize both.
  • It provides greater transparency for consumers to understand the details of the policy, especially how the cash value account performs.
  • Last but not least, it is, in general, much cheaper than whole life insurance.
Quaranteed and Permanent

Yes. Guaranteed Universal Life Insurance (GUL) provides the same guaranteed and permanent coverage for less than half the cost of Whole Life Insurance premiums.

>>MORE: Understanding Indexed Universal Life Insurance: Is it Good for Retirement Savings?

Common Product Features of Universal Life Insurance 

In answering the question “what is universal life insurance?” we’ll look at the features: 

Cash value: A key feature of a universal life policy is that it has a savings part called “cash value.” Part of your premium goes towards paying the death benefit and the other goes towards building up the cash value on the policy.  

You can withdraw or borrow against that cash value. However, withdrawing or borrowing may reduce the death benefit, cause a policy to lapse or incur taxes, depending on how you withdraw or borrow from the policy. The amount you can withdraw varies by company, as well as how you can do it. You also may have to wait until the policy has a certain amount of cash value built up.   

>> MORE: Case Studies of Universal Life Insurance

Interest: That cash value also earns interest. Depending on the type of universal life insurance, it could be linked to the performance of a market index. A policy could also earn value based on investments you make directly. The interest can go up or down, though may policies have a floor so that you do not lose too much.

Flexible premiums and death benefit: Premiums for universal life insurance can also be flexible. The policy may offer a grace period if money is tight and you need to make up bills. Sometimes a policy or insurer may allow you to use the cash value of the policy to make payments on the policy, however, that can cause the policy to lapse if you use up the cash value. You also risk reducing your death benefit on some policies.  

You can also increase or decrease the death benefit that is paid out to your beneficiaries. If you increase the benefit, you may also increase the premium you pay. Decreasing the benefit may save money. Often, you may have to undergo a medical exam to increase your death benefit.

>>MORE: Understanding How Guaranteed Universal Life Insurance Works

Universal Life Insurance Riders 

These plans have a wide variety of riders that companies offer. These vary by plan and company, so be sure to talk with an agent about your options. Many riders allow you to access the cash easier if you become injured, ill or disabled. Some offer money on top of the death benefit if you die by accident. These are just a couple of the main types, as insurers like to offer greater flexibility to your universal life insurance plan.  

>>MORE: Understanding How Variable Universal Life Insurance Works

Pros and Cons of Universal Life Insurance

Whether universal life insurance is right for you depends on your financial goals. Understanding the pros and cons can help you understand what is universal life insurance, rather than just searching terms like “how universal life insurance work?” You can also better assess these plans based on your lifestyle and goals.

Pros:

  • Universal life insurance is a good choice if you want a permanent plan that won’t lapse as long as premiums are covered.
  • Many types of universal life insurance, like indexed universal life insurance and variable universal life insurance, give you a good deal of flexibility in premiums paid and being able to adjust the death benefit.
  • You have the pros of a death benefit combined with savings options.  
  • Many plans allow you to invest and earn interest on the cash value of your plan.
  • The death benefits are paid out no matter when you pass away.
  • Savings are often tax-deferred.
  • If you prefer a permanent life insurance policy (to a term life insurance policy), universal life insurance is usually a better option compared to whole life insurance and it is also usually cheaper than whole life.
  • Universal life insurance offers you a wide range of options of products (guaranteed, indexed, and variable) to choose from to meet your objectives and goals.
  • Universal life insurance offers much greater transparencies in how different components of the policy work and how to manage them effectively.

Ed Slott – a renowned tax expert – on tax benefits of IUL policies

Compare quotes of 30+ IUL products

Cons:

  • Cash value on whole life plans tends to increase on a set schedule, whereas universal life cash values tend to fluctuate with markets in many plans.
  • Flexibility of the plan can possibly lead to the temptation to reduce the death benefit. In general, if the idea is to have a set amount of money for your beneficiaries after you die, having a more fixed option may work better.
  • If you only want the plan for a set amount of time or to a certain age, a more limited plan like term life might be a better option.
  • If you have other savings and investing methods in place, you may not be interested in a plan with cash value.

You can read more in detail about the disadvantages of universal life insurance here.

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

Whom is Universal Life Insurance For? 

This product is for anyone who wants a death benefit in a capacity where the plan does not lapse as long as you are keeping up on your payments. 

If you want a fixed death benefit and fixed premium with the lowest premium payment, you may want to look into guaranteed universal life. However, if you are more focused on building cash value on the policy, you can look into an indexed universal life policy. If you want a highly flexible option that allows you to build cash value based on direct investments, then look into a variable universal life insurance plan.

How Much Does It Cost? 

The cost depends on the policy. Below is a chart outlining some mock premiums we have access to. This is for a man who is 45 at the time of the policy activation.   The illustrations of different products come from different insurance companies and are meant to provide you with some ideas of costs. You should expect your quotes to be very different from this depending on your health condition and the companies that you choose to shop with.

Guaranteed Universal LifeIndexed Universal Life PolicyVariable Universal Life Insurance Plan
Death benefit$150,000$150,000$150,000
Monthly premium$115.52$210$230
Cash value at 70N/A$94,147$158,371

>>MORE: AAA Universal Life Insurance Review

Final Thoughts

So, what is universal life insurance? Universal life insurance is a good option if you want to combine life insurance with savings and even investment options. You can also borrow or withdraw from the plan, though that could affect the cash value and even the death benefit. Premiums and death benefits also tend to be more flexible on these types of plans. 

Ed Slott – a renowned tax expert – on tax benefits of IUL policies

Compare quotes of 30+ IUL products

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