Last Updated: January 11, 2022
Nowadays, investing in a life insurance policy might be one of the smartest decisions to make. But with so many different types of life insurance, which one is the right fit? This article addresses the question of what is universal life insurance? How does it work? What are the advantages and disadvantages of having universal life insurance?
What Is Universal Life Insurance and How Does It Work?
Universal life (UL) insurance is a type of permanent insurance with low premiums, and investment savings at a minimum required cost to keep the policy out of premium payment, with the possibility of a flexible-premium option. (Some insurance requires a single lump-sum premium, while others require scheduled fixed premiums.)
With universal life insurance, clients can modify both premium and death benefit policies. The premiums, themselves, consist of two parts:
Cost of Insurance (COI)
COI is the minimum payment required to keep your insurance policy active, depending on your age, insurability, and the insured risk amount. In addition, it considers all the charges and expenses related to your accounts, such as policy administration and mortality charges.
The cash value of universal life insurance earns interest based on the greater of the current market or the minimum interest rate. Policyholders can access cash value based on the amount it accumulates, which doesn’t directly affect the death benefit of UL insurance.
As with any life insurance policy, policyholders have the option to add riders to their universal life policy. How universal life insurance works is that riders can be added as features to your policy, which might come at an additional cost. For example, an added rider to a universal life policy can include the accelerated death benefit rider, which creates a provision for the terminally ill policyholder to receive a part of the death benefit beforehand—with a documented life expectancy of up to two years.
|NOTE: Due to the COVID-19 pandemic, there are more options for insurance, one of which includes wedding insurance during the CoronaVirus pandemic.|
Types of Universal Life Insurance Policies
There are four types of universal life insurance policies that vary in costs and features. Therefore, it’s essential to understand which one best fits your needs.
Traditional or Non-Guaranteed Universal Life
Traditional UL insurance requires that mortality and interest rate expenses be factored in when calculating the premium rates and cash value. It also allows flexibility on premium payments. But this can be a bit deceptive since some agents can sell this policy at the lowest premium available but don’t abide by insurance companies’ recommended premiums.
No-Lapse Guarantee Universal Life
With this guaranteed universal life insurance policy, your premium is guaranteed never to increase. As long as it’s paid on time, your death benefit will remain effective. This UL insurance acts as a life-long term policy or term life without expiration, all with fixed premiums, making it an excellent option for over 55 years of age. And it can be used for many purposes, such as final expense coverage, estate tax liquidity, leaving an estate for your family, etc.
Indexed Universal Life (IUL)
With Indexed Universal Life insurance, you have the option to tie your return to a primary stock market index, such as the S&P 500. With such policies, the interest you obtain varies according to the index. Indexed universal insurance is an excellent option since you can earn a better interest rate. But it has similar issues as with the above-mentioned traditional UL insurance.
Variable Universal Life (VUL)
The VUL insurance policy is similar to a mix between the traditional UL insurance policy and the indexed universal life insurance policy. You have the option to invest in the stock market as opposed to tying yourself to a particular stock market index, and the investments are added to a sub-account. With this type of policy, you can manage different mutual funds that will, in turn, dictate the performance of your variable universal life insurance policy. Unfortunately, this type of insurance is very volatile and highly dependent on the market, which may end up costing you another repayment of the premium.
|NOTE: Life insurance goes hand-in-hand with health insurance to ensure you’re financially protected if things go awry. Check out the best international health insurance and find the best fit for you.|
Cost of Universal Life Insurance
The cost of this type of life insurance greatly depends on the age you buy your insurance. For example, if you wish to have a $500,000 policy, the yearly payments you’re required to make can range from around $1,700 to $10,000+, depending on the age you sign onto UL insurance. If you purchase this type of life insurance at a younger age, the cost of UL insurance will be significantly less expensive.
But there are more specific criteria that also dictate how universal life insurance works in terms of pricing. For example, if you’re a smoker, your UL insurance policy will be more expensive. Costs for smokers around the age of 30 range from around $3,600 per year on premiums for a $500,000 policy.
Another aspect that helps define universal life insurance includes administrative fees. This insurance policy has a long list of administrative fees, such as commission and expenses costs, etc., which increases the overall price and will not build cash value in the first three years.
NOTE: Although it’s advisable to obtain life insurance when you’re younger, there are still options for life insurance for seniors over 70. Simply find the right package, so you don’t end up paying astronomical amounts for the premium.
Benefits and Disadvantages of Universal Life Insurance
UL insurance comes with its own set of pros and cons, which might make or break your decision on whether this is what you’d like to invest in over the years.
Benefits of Universal Life Insurance
- UL insurance is an excellent choice when it comes to taking control over your policy, meaning you can choose your own premium and coverage. Through this type of life insurance, you can adjust the frequency and amount of your payments. There are regulations, but, in general, you’re permitted to overpay or underpay according to your financial situation.
- You also have the option to change your death benefit policy by adding more coverage or decreasing it in just a few simple steps.
- Interest rates depend on the investments of the insurer in the market, meaning your cash value might increase over time, as opposed to a whole life policy, where you have one guaranteed rate.
Disadvantages of Universal Life Insurance
- UL insurance requires more responsibility. You have the option to underpay or overpay your account but within limits. If you underpay for a prolonged period, you must make larger payments to cover the underpayments and maintain the coverage your account offers.
- If you consider universal life insurance as an investment, interest rates play a significant role. They may increase over time—depending on the market—which can potentially be substantial. But it can also mean you might lose money in the process. With the market’s unpredictability, your rates can shift, confusing original payments made to your account and your overall account value.
- UL insurance does come with an extensive list of administrative fees that can build up over time.
|NOTE: UL insurance cash value is meant to be used while you’re alive. The cash value that remains once you pass away reverts back to the life insurance company. Your beneficiaries get the death benefit, i.e., the face value of the policy minus any unpaid policy loans and withdrawals.|
Difference Between Whole Life and Universal Life Insurance
Both whole life and universal life are kinds of permanent insurance—a type of insurance that provides lifetime coverage. But although they share this similarity, whole life and universal life differ in many areas.
Whole Life Insurance
You are covered during your entire lifetime with whole life insurance, no matter how long you live. Through this insurance, your beneficiaries will receive the death benefit after you pass, as long as you keep paying your premiums.
Suppose you’re considering universal life insurance vs whole life. In that case, this is an excellent choice for people who want to take care of long-term responsibilities in their families, such as post-death expenses or a dependent adult child’s care. Check out the best whole life insurance companies if this sounds like it may apply to your situation.
A whole life insurance policy guarantees cash value, as well as financial flexibility, as seen through the dividends your company offers—which can be received annually in cash, or you can leave it to accumulate interest. But this type of policy is relatively expensive when compared to other insurance policies.
What is universal life (UL) insurance compared to whole life insurance? The most significant difference is that UL insurance offers more flexibility. You can adjust (reduce or increase) your death benefit and pay premiums at whatever amount you wish, as long as there’s money in your account.
One of the most significant universal life insurance benefits compared to whole life insurance is that you can adjust the face value of your coverage, choosing to increase or decrease payment for premiums. In addition, you can also partially withdraw or borrow from your policy’s cash value—but not go overboard with too many withdrawals. But UL insurance interest rates depend on the market’s volatility. But this type of insurance does have many administrative fees.
Why Should You Consider Universal Life Insurance? Life insurance is a wise investment because it’s an excellent tool for your family to pay off auto or home equity loans and such expenses as hospital bills and funeral costs. In addition, UL insurance endures throughout your lifetime and can be of great use upon your passing.
UL insurance—like any form of insurance—depends on your family structure and financial situation. But with this life insurance, you receive flexibility in your payments and can withdraw or borrow cash value when needed.
Most life insurance policies allow money withdrawals, which is also the case with UL insurance. But withdrawals are taken from your cash value, while loans are taken from the policy against the value. Withdrawing from your cash value can typically be available after 10 years of holding your policy.
What is universal life insurance compared to variable insurance? Variable insurance is the same as UL insurance with a few added aspects, such as the option to invest in the stock market instead of pursuing a particular stock market index, where you get a sub-account to manage with your investments.