Universal life insurance is a type of permanent life insurance. It allows for a greater degree of flexibility and often lower cost than whole life insurance, another popular type of permanent insurance. The policyholder’s flexibility extends to the amount of the monthly premiums paid, as well as their frequency. It also allows a policyholder to change the death benefit as well as death benefit options (level or varying with cash value increases).
The Flexibility of Universal Life Insurance (UL)
Flexible Death Benefit – With term insurance or whole life insurance, your death benefit is typically etched in stone. With the Universal Life policy, the policyholder has the option to decrease or increase the death benefit (according to the contract) which removes the need to purchase a separate policy and possibly having to go through medical underwriting once again. Life is not static so having a life insurance policy with flexibility is a bonus.
Payment Flexibility – After you pay your initial payment, a policyholder may vary the premium amount and frequency of payment, or even skip premium payment as long as there is enough cash value in the policy to cover the policy charges.
Many universal life insurance policyholders opt to increase their premium payments in the early years, so as to potentially lower the premiums in later years. As your financial needs change during your life, you will likely discover that the premium flexibility in your UL policy is a great option.
Cash Value Options
Probably the most popular feature of Universal Life Insurance is the ability to accumulate significant cash value in your policy over time. The cash value accumulates by earning a minimum interest rate stated in the insurance contract or an interest amount based on the performance of the insurer’s investments; whichever is greater.
This accumulated cash can be accessed by the policyholder in various ways and can be used as needed by the policyholder:
Policy Loans – The policy owner can easily access the cash value via a policy loan. You will be charged a small amount of interest but you are not required to repay the loan. Unpaid loans and interest are deducted from the death benefit when the insured has passed away.
Withdrawals – Rather than a loan, you have the option to make a withdrawal of your cash value. You do not repay it and you are not charged interest. Depending on the withdrawal amount, your death benefit will be reduced by the amount of the withdrawal at the time the withdrawal is made.
Paid-Up Policy – Once you’ve reached a considerable amount of cash value in your account, you have the option to stop paying premiums and instead, have them deducted from your cash account. Always check with your agent or company before you do this to make certain you have the equity to carry your policy over your lifetime.
Policy Surrender – If you want all of the cash in your policy and do not need the death benefit, you can surrender the policy and receive all of the accumulated cash minus any surrender charges.
Advantages of Universal Life Insurance
Although we’ve already discussed the flexibility and cash component, there are some solid reasons why Universal Life can be a great solution for your insurance needs:
Permanent Insurance Coverage – A properly funded Universal Life policy can provide you and your family with a lifetime of coverage that translates into peace of mind knowing if the worst happens, your family will be financially secure.
Tax Deferment – If you decide to access your cash value by way of a policy loan, the proceeds are not taxable. You will have to pay a modest amount of interest but there is no credit check and you can use the loan proceeds in any way you choose. Please note, however, any unpaid loans or interest will be deducted from the death benefit if you die before the loan is repaid.
Cash Account will Cover Premiums – If for some reason you become strapped financially, the insurance company will use the funds in your cash account to pay your premium(s) thereby preventing your policy from lapsing.
Higher Premiums – Compared to term life insurance, Universal Life can cost as much as three or four times more because of a higher cost of insurance and policy fees.
Loan Repayments are Required – Although policy loans are certainly convenient for the policyholder, they must be repaid along with the interest in order to prevent your policy from lapsing. Also, some policies will reduce the death benefit by the amount of the outstanding loan.
Conservative Interest Rates – If you are considering using your Universal Life policy as an investment, you’ll likely be disappointed in the conservative rate of interest paid in your policy.
The Universal Life policy is also more transparent than a Whole Life policy, in that policyholders can see exactly how the various policy elements (premiums, death benefit, mortality charges, interest, and expenses) interact.
Unlike whole life insurance, the cash value, expense and mortality charges and pure insurance amounts are unbundled. This unbundling allows for a much greater degree of performance transparency and helps the agent and policyholder implement more effective planning for the future.
However, this type of policy does carry some risk. The policy’s premium is not guaranteed – it is a projection based on an assumed interest rate and cost of insurance. If these assumptions are not met in the future, the policy could lapse unless additional premium is paid into the policy to bring it up to speed.
Lapse Protection in Newer Universal Life Policies
As many Universal Life policyholders faced the potential of lapsed policies, the insurance companies knew they needed to create a policy that had more guarantees built in. To that end, insurance companies developed a version of universal life that had secondary guarantees added, where if certain minimum premium payments are made for a given period, the policy will remain in force for the guarantee period even if the cash value drops to zero. These policies are commonly referred to as No-Lapse Universal Life or Guaranteed Universal Life Insurance.
One of the key features of this type of policy is the guaranteed death benefit available at an affordable premium rate. While these policies are often a good choice for those wanting low-cost permanent protection, there are some risks involved. It’s important to note that any of the following changes can affect the length or existence of the lapse protection guarantee:
- A change in the amount and/or frequency of premium payments
- A loan or partial surrender from the policy
- A change in the death benefit option
- An increase in the face amount of the policy (including adding additional riders)
- A decrease in the face amount of the policy
Companies we Represent that offer Universal Life
LifeInsure.com represents many of the top-rated insurers in the U.S. with the majority of them offering Universal Life Insurance:
AIG, one of the leading insurers nationally and globally, offers several Universal Life and Indexed Universal Life products:
- Secure Lifetime GUL 3
- AG Secure Survivor GUL II
- Value+ Protector – IUL
- Max Accumulator+ – IUL
- Universal Life
- Indexed Universal LIfe
Banner offers its Life Step UL policy for those consumers preferring lifetime guaranteed coverage. They also have a Short Pay Guarantee where the insured can pay the policy off in 10 or 15 years and then continue to have lifetime coverage.
Pacific Life offers several different Universal and Indexed Universal Life products to meet the needs of prospective customers:
Indexed Universal Life
Prudential, a very popular U.S. insurer offers several Universal and Indexed Universal Life products to meet their customers’ needs:
Indexed Univeral Life
The above-mentioned insurance companies represent just a portion of the many highly-rated carriers represented by LifeInsure.com. You are welcome to CLICK HERE to see a complete list of the companies we will trust to handle your specific case and your specific needs.
We consider Mutual of Omaha one of our go-to life insurers because of their product availability, competitive pricing, and outstanding customer service.
Mutual offers Universal and Indexed Universal Life Insurance.
- Guaranteed Universal Life
- Accum UL
- Life Protection Advantage – IUL
- Income Advantage – IUL
The Bottom Line
Consumers are fortunate that in the insurance marketplace today, anyone can go online and get an insurance quote instantly from multiple companies by completing a quick form or pick up the phone and reach an experienced agent. Most independent insurance brokers like LifeInsure.com represent many of the highly rated insurance carriers and will also have companies available to handle high-risk cases.
In my 20+ years as an independent life and disability insurance broker, I have personally assisted thousands of clients with their life and disability insurance needs. Being independent, I represent many highly-rated insurance companies and, because I am not beholden to any one insurance company, my focus is to find the right company and policy for each individual client. I believe that when people shop for insurance (or anything else, for that matter) on the Internet, they are looking for a simple, non-intrusive, non-pressure method of doing so. I strive to treat my prospective clients with the utmost respect and I believe an educated prospect can make the right decision without sales pressure. Please feel free to contact me at your convenience.