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Universal Life Insurance
"Universal Life" insurance is a permanent policy that grows in value. When you pay premiums, anything over the insurance cost goes into a cash value account. This account earns interest every month, and the insurer takes out the cost of insurance (COI) charge. If you don't pay for a month, this charge comes from your cash value. The interest rate can be tied to a financial index, decided by the insurer. This means the interest might change, but the cash value grows steadily, making Universal Life a reliable investment choice.
Universal life insurance evolved from whole life insurance, offering more flexibility and potentially higher cash value growth if interest rates beat those of the insurer's general account, which influences whole life's cash value growth. Its key flexibilities include adjustable death benefits and premium payments.
You can raise or lower the death benefit more easily than with whole life, without needing to surrender or replace your policy. Additionally, you can vary your premium payments from the minimum needed to maintain the policy's guarantees to the maximum permitted by IRS regulations.
In whole life insurance, as long as you pay your premiums, the death benefit is guaranteed if you die. But with universal life insurance, some of the risk is on you. If you don't have enough cash value or premiums to cover the cost of insurance, the policy could lapse, and the death benefit won't be paid out. Insurers sometimes sweeten the deal by offering guarantees: if you make certain premium payments for a set time, the policy stays active even if your cash value hits zero.
Different Universal Life Insurance Types
Single Premium Universal Life
Single Premium UL is purchased with a single, hefty upfront payment. It stays valid as long as charges don't empty the account. Due to tax code changes, it's now termed a "Modified Endowment Contract (MEC)" with different tax rules. This applies to all policies paid off in 5 years or less.
Fixed Premium Universal Life
Fixed Premium UL is funded through regular payments over time. Usually, these payments last for a shorter duration than the policy itself, say 10 years, aiming to make the policy paid-up afterward. However, if the plan's performance doesn't meet expectations, the account value may not be enough to sustain the original policy. In such cases, the policyholder can choose to: 1. Leave the policy as is and risk early expiration if charges drain the account, or 2. Pay more to maintain the death benefit, or 3. Reduce the death benefit.
Flexible Premium Universal Life
Flexible Premium UL lets you choose how much to pay each time the premium is due. It offers two death benefit options: 1. Level death benefit (Option A), or 2. Increasing death benefit (Option B). Policyholders often start with a big deposit and then pay irregularly.
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TermLifeProvider | Home of HassanHelps is a leading life insurance brokerage with the best rates from top insurers. With over 16 years, we've helped thousands save on life insurance.
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