Life insurance is a valuable tool to protect your loved ones in the event of premature death. There are several types of life insurance, including term, whole, and universal life insurance, and understanding their differences is essential to determining which one is best for you. In this article, we’ll take a look at how universal life insurance works, its pros and cons, and how it compares to other types of life insurance.
What is universal life insurance?
Universal life insurance is a type of permanent life insurance. It protects the policyholder for the rest of their life or until they reach a certain age – often between 90 and 120 – assuming they meet monthly premiums.
The insurer pays a death benefit to the beneficiaries of the policy after the death of the policyholder. Some universal life insurance policies also create cash value, which policyholders can borrow, withdraw, or use to combat rising premiums as they age.
How does universal life insurance work?
When a person takes out a universal life insurance policy, they enter into a contract with the insurer. They agree to pay monthly premiums. In exchange, the insurer undertakes to pay a death benefit to the beneficiaries upon the death of the insured.
Unlike whole life insurance, which has fixed premiums, universal life insurance premiums are often variable and generally increase as the policyholder ages. But they can also be more flexible than whole life insurance premiums. See the section on cash value below for more information.
The best life insurance companies also allow policyholders to personalize their contract with endorsements. The exact options vary from insurer to insurer.
The policy only remains in force as long as the policyholder continues to pay the premiums. If they don’t even make a single payment, they could lose their coverage.
Types of universal life insurance
Universal life insurance comes in three main types: indexed universal life insurance, variable universal life insurance and guaranteed universal life insurance.
Indexed universal life insurance
In addition to providing a death benefit, indexed universal life insurance (UIL) allows policyholders to allocate a portion of their cash value – the extra money paid to the insurer over and above the cost of the cash. insurance – to an equity index account.
This means that the money left over after paying the policy fee goes into an account where it can earn interest. The interest rate depends on the performance of a stock index, such as the S&P 500. However, the money is not directly invested in stocks.
These policies are less risky than variable universal life insurance, but there are often limits on the amount of interest the policyholder can earn. In addition, if the index shows a loss, the contract may not earn interest for a given year.
Variable universal life insurance
Variable universal life insurance (ULV) is similar to indexed universal life insurance, but it has investment sub-accounts that allow policyholders to invest their cash value in real securities. This could generate significant returns if the policyholder invests wisely. But this opens up the possibility of huge losses if their investments go wrong. In some cases, they could lose all of the cash value they have accumulated.
In addition to being more complex than other types of life insurance, variable universal life insurance also tends to be more expensive.
Guaranteed universal life insurance
Guaranteed Universal Life Insurance (GUL) is the simplest and cheapest form of universal life insurance. This type of policy generally offers no cash value. It has fixed premiums, but policyholders usually don’t have the ability to adjust their premium payment or death benefit amount as they can with indexed or variable universal life insurance.
Universal life versus other types of life insurance
A universal life insurance company also offers term and whole life insurance policies.
Universal life vs whole life insurance
Whole life insurance is another type of permanent life insurance. It’s more expensive than universal life insurance, but it offers more guarantees. These policies offer guaranteed premiums that will not increase. They also offer guaranteed death benefits and a guaranteed minimum rate of return for the cash value component of the policy. Some whole life insurance policies also pay dividends, although these are not guaranteed.
These policies might be suitable for someone who wants lifetime coverage and is willing to pay extra for these additional guarantees.
Universal life insurance vs term life
Term life insurance only covers the policyholder for a certain number of years. If the policyholder dies within the time limit, the insurance company pays the benefit to the beneficiaries of the policyholder. If the policyholder is still alive at the end of the term, the insurance company keeps all the money.
These policies are more affordable than permanent life insurance. These are popular choices for parents of young children who want to make sure their families can continue to pay their bills after they die.
Advantages and disadvantages of universal life insurance
Here are some of the pros and cons of universal life insurance.
- Coverage for your whole life
- Flexible premiums
- Can accumulate cash value, which the policyholder can borrow or withdraw as needed
- Coverage can expire with a single missed payment
- More complex than term life insurance
Cash value of universal life insurance
To keep a universal life insurance policy, you must pay premiums that cover the cost of the insurance. But with indexed or variable universal life insurance, policyholders can also pay more than the minimum cost of insurance. The excess is added to the cash value of the policy and may generate interest.
Policyholders can use this cash value in different ways. One option is to cover the cost of future premiums. This allows the policyholder to skip a payment or two or possibly stop the payments altogether if their cash value is substantial.
They can also withdraw the cash value to use it for their own purposes. But they will pay taxes if they do and it will reduce the death benefit available to their heirs. Another option is to borrow against the cash value of the life insurance policy. The policyholder will not have to pay tax if he does, but he must repay what he borrowed with interest. If they do not repay the loan, the insurer subtracts the outstanding balance from the death benefit on the death of the policyholder.
Who should buy universal life insurance?
Universal life insurance is a good choice for those looking for an insurance policy that protects them for their entire life. Those interested in the investment opportunities that a universal life insurance policy can offer should also take a closer look.
If you think universal life insurance isn’t the right option for you, compare whole life insurance to term life insurance to see if any of them are right for you.