You may be considering a permanent life insurance policy if you’re looking for lifetime coverage and a savings component that helps you build wealth. Universal life insurance offers both features with a degree of flexibility that other policies don’t.
With universal life, you can change the amount you pay after you purchase your contract. So if your financial situation changes, you can adjust your insurance to fit your current needs. Here are the key details to know.
What Is Universal Life Insurance?
Universal life (UL) insurance is permanent life insurance that offers financial protection for your beneficiaries and a cash value component. Unlike term life insurance, which provides coverage for a specific period, UL lasts your entire lifetime, as long as you meet your policy’s conditions.
With some types of permanent life insurance—notably, whole life policies—your premiums are level until your policy is fully “paid up.” In contrast, UL insurance allows you to modify your premium and death benefit amount within certain limits, giving you more control over your insurance coverage and financial planning.
The policy’s cash value earns interest based on current market or interest rates. You can access it through loans or withdrawals, offering additional financial flexibility.
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How Does Universal Life Insurance Work?
When you purchase a UL insurance policy, you pay an initial premium—usually monthly or annually—based on the death benefit size and your age, sex, and health condition. Part of each premium covers the cost of the insurance itself. The remaining amount goes toward your policy’s cash value, which earns interest from the insurer.
As your cash value grows, you can access it by making a withdrawal or taking out a loan against your policy, although failing to repay the loan reduces the death benefit paid out to your beneficiaries. Alternatively, you can surrender (i.e., cancel) your policy to get a cash payout or use the accumulated cash value to pay a portion of your future premiums.
How Is UL Different from Other Coverage Options?
The main distinguishing feature of UL insurance is that you can use your cash balance to adjust your premiums. For example, say you own one of these policies and decide to start your own business. Because you expect your income to fluctuate as you make this transition, you may decide to temporarily reduce your premium payments, using the accumulated cash value to cover the difference.
Death Benefit and Cash Value
With universal life insurance, the cash value component is separate from the death benefit that is often thought of as the core piece of a life insurance policy.
Modifying Your Universal Life Insurance
You retain the ability to modify your policy’s death benefit later on if your coverage needs change. Some universal life policies offer a rider known as a guaranteed insurability option (GIO) or guaranteed purchase option (GPO). It allows you to purchase additional coverage at specified times or life events—such as marriage or the birth of a child—without undergoing further medical underwriting. This option can be beneficial if you anticipate needing more coverage in the future but want to avoid the risk of being denied due to health changes.
Types of Universal Life Insurance
The three main types of universal life insurance are variable life insurance, guaranteed universal life insurance, and indexed universal life insurance. We’ll walk through what each means.
1. Indexed Universal Life Insurance
With indexed universal life insurance, the cash value of the policy is tied to the performance of an index of stocks. This could be the S&P 500, The Russell 2000, or the FTSE 100. With this policy, you’re typically trading some security for higher potential returns. While index performance can outperform other policy options, such as interest rate return, it carries some downside risk.
2. Variable Universal Life Insurance
With variable universal life insurance, instead of investing in an index, your investments are grouped into different assets, similar to how mutual funds work. Your age, expected time of retirement, and risk tolerance will likely determine the exact allocation you want to pursue with the cash value of your variable universal life insurance policy.
3. Guaranteed Universal Life Insurance
This option removes most or all of the cash value component of a universal life insurance policy, in exchange for a much lower monthly premium. The main component of a guaranteed universal life insurance policy will be the guaranteed death benefit, offering peace of mind in exchange for a relatively lower monthly premium.
Pros and Cons of Universal Life Insurance
When considering UL insurance, weigh the advantages and disadvantages to determine if it’s the right fit for your financial goals and needs.
Pros
- You receive lifetime coverage as long as you pay the required premiums.
- Flexible premiums allow you to change your premium payments within certain limits, so you can adapt the coverage to your current situation. You can also increase or decrease your death benefit.
- You can accumulate cash value on a tax-deferred basis, which you can access during your lifetime.
- Your cash value earns interest based on prevailing rates, which offers the potential for higher returns than whole life insurance during certain market conditions.
Cons
- Permanent life insurance, including universal life, typically has higher premiums than term life insurance. The more riders you add to your policy, the more it may cost.
- A variable interest rate means your annual return isn’t locked in as it would be with a whole life policy.
- UL insurance can be more complex than term policies and whole life insurance. It’s best suited to policyholders who understand how it works.
- Your policy could lapse if the cash value is depleted due to low interest rates or insufficient premium payments.
Who Should Consider Universal Life?
Universal life insurance offers a unique combination of financial protection for your family and a wealth-building component. Being able to alter the premium and death benefit amount later can be particularly appealing if your income varies.
In general, you should only consider a permanent life insurance product if you can afford the premiums, which may be higher than other coverage options. It can take several years to build the cash value you may need to adjust your payment amount. And if you surrender your policy within the first few years, you may face surrender charges.
The complexity of UL insurance also makes it a better fit if you’re relatively savvy about financial planning. Universal life insurance typically has more rules and potential fees than term coverage. So it’s crucial to educate yourself and ask your insurance representative or financial planner about any features you don’t understand.
Finding Guaranteed Acceptance with Colonial Penn
As you consider your needs and goals, carefully weigh your options and choose the right insurance product for you.
If you decide you’d rather have the level premiums and fixed return of a whole life policy, consider guaranteed acceptance life insurance coverage from Colonial Penn Life Insurance Company. You don’t need to answer any health questions or take a medical exam to obtain protection*. For more information, reach out to a representative today.
Insurers and their representatives are not permitted by law to offer tax or legal advice. The general and educational information here supports the sales, marketing or service of insurance policies. Based upon individuals’ particular circumstances and objectives, they should seek specific advice from their own qualified and duly-licensed independent tax or legal advisors.
*This is an advertisement for life insurance. This is a graded death benefit contract with a limited death benefit payment in the first 2 years. Once insured your rate will never go up. You choose an option that’s best for you. Your premium is based on the option you choose. Your benefit amount is based on your age and gender. Visit ColonialPenn.com for details about rates, benefits, limitations and exclusions.
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