If you’re looking for a life insurance policy that offers lifelong coverage and flexibility, universal life insurance might be the right choice for you. With universal life insurance, you can tap into the policy’s cash value and adjust your premium payments according to your needs. However, it’s crucial to work with a trusted financial advisor or experienced life insurance agent to navigate the complexity of these policies.
What Is Universal Life Insurance?
Universal life insurance is a type of permanent life insurance that allows you to adjust your premium payments within certain parameters. It also offers the potential for larger cash value growth compared to other types of permanent life insurance, such as whole life insurance. Understanding the different types of universal life insurance is essential before purchasing a policy.
How Does Universal Life Insurance Work?
Universal life insurance, also known as adjustable life insurance, stands out because of its flexibility in premium payments. This feature is particularly valuable if your cash flow varies. Additionally, you can adjust your death benefit amount over time. Lowering the death benefit is possible if your need for life insurance decreases, while increasing it may require further underwriting.
Universal life insurance can provide coverage for the rest of your life as long as you make the premium payments. It also includes a cash value component, allowing you to withdraw money from the policy or take out a policy loan. If you choose to surrender the policy, you’ll receive the cash value minus any surrender charges.
Benefits and Disadvantages of Universal Life Insurance
Benefits:
- Cheaper than whole life insurance due to fewer guarantees.
- Flexibility to vary premium payment amounts and adjust the death benefit amount within limits.
- Cash value component that allows for withdrawals and policy loans.
Disadvantages:
- Can be challenging to understand due to the different types with distinct features.
- Not all universal life insurance guarantees gains on cash value.
- Policy loans and withdrawals can deplete cash value and lead to the policy lapsing without extra premium payments.
- Variable universal life insurance requires active management due to underlying sub-accounts.
Guaranteed Universal Life Insurance
A guaranteed universal life (GUL) insurance policy offers a death benefit and premium payments that remain constant over time. You’ll select an age at which the policy ends, such as 90, 95, 100, 105, 110, or 121, with a higher age resulting in increased premiums. GUL typically has minimal cash value and is the most affordable type of universal life insurance, focusing on lifelong coverage rather than significant cash value accumulation.
GUL is sometimes referred to as “no lapse guarantee universal life insurance” due to issues with traditional, non-guaranteed universal life insurance policies lapsing when their cash value couldn’t cover expenses and insurance costs. Newer no-lapse policies promise to remain in force but may terminate if you miss a payment, as there is little to no cash value to cover the premium.
Who May Benefit From a Guaranteed Universal Life Insurance Policy?
GUL insurance is suitable for individuals seeking lifelong coverage without focusing on the investment aspect of cash value. It does not offer flexibility with premium payments or death benefit amounts.
Indexed Universal Life Insurance
Indexed universal life insurance (IUL) provides lifelong coverage with flexibility in death benefit and premiums. You can adjust these aspects within certain limits to accommodate your changing needs and budget. The cash value component in IUL is tied to a stock market index, such as the Nasdaq-100 or S&P 500, or a combination of indexes. Some policies may also offer a fixed-interest investment option.
When you pay premiums, part of the money covers policy fees and charges, while the remainder goes into the cash value. It’s important to understand the potential investment gains’ boundaries, such as participation rates and caps on gains. An IUL policy also guarantees a minimum return rate in case the index plummets.
While IUL policies can be complex, they remain popular due to advisors recommending them. However, consumers should exercise caution, as misleading sales practices have been associated with IUL policies. Consider fully understanding the product and seeking additional information from reputable sources like the Center for Economic Justice.
Who May Benefit From an Indexed Universal Life Insurance Policy?
Individuals who desire flexibility in adjusting death benefits and premiums, along with a willingness to take on investment risks, might find IUL policies appealing.
Variable Universal Life Insurance
Variable universal life (VUL) insurance offers flexibility in premium payments and death benefit amounts while requiring active management. Policyholders can select sub-accounts for their cash value investments and may have the option of a fixed interest rate for cash value. Returns on cash value depend on the performance of the chosen investments, making it crucial to monitor and manage these policies.
It’s important to note that cash value can decrease if investments perform poorly. VUL policies typically have higher fees and greater complexity compared to other universal life insurance options.
Who May Benefit From a Variable Universal Life Insurance Policy?
Individuals who want an active role in selecting sub-accounts for cash value investments and are comfortable with investment risks may find VUL policies attractive. However, a VUL policy is not suitable for someone seeking passive investment or with a low tolerance for risk.
Who Should Consider Universal Life Insurance?
Consider universal life insurance if you’re interested in adjusting premium payment amounts within limits. Additionally, if you want the potential for greater cash value accumulation beyond a fixed percentage, both indexed and variable universal life insurance offer such potential, subject to the performance of underlying investments.
Alternative Types of Life Insurance
In addition to universal life insurance, other types of life insurance include:
- Cash accumulation UL: A universal life insurance policy designed to build up cash value quickly early on.
- Current assumption UL: A traditional UL policy with a low-cost death benefit that is not guaranteed. Cash value growth depends on the insurer’s crediting rate, and policyholders must ensure sufficient funds cover fees, insurance costs, loans, or withdrawals to prevent policy lapse.
- Whole life insurance: The most expensive form of life insurance due to guarantees like fixed premiums and a guaranteed minimum rate of return on cash value.
- Term life insurance: Offers level premiums for a specified duration, such as 5, 10, 15, 20, 25, or 30 years. It lacks a cash value component, and premium payments cannot be adjusted like in universal life insurance. However, it is the most affordable life insurance option.
FAQs
- What is universal life insurance?
- How does universal life insurance work?
- What are the benefits and disadvantages of universal life insurance?
- What is guaranteed universal life insurance?
- Who can benefit from a guaranteed universal life insurance policy?
- What is indexed universal life insurance?
- Who can benefit from an indexed universal life insurance policy?
- What is variable universal life insurance?
- Who can benefit from a variable universal life insurance policy?
- Who should consider universal life insurance?
- What are some alternative types of life insurance?
Conclusion
Universal life insurance offers flexibility and lifelong coverage, making it an appealing choice for many individuals. By understanding the various types of universal life insurance and their features, you can make an informed decision about the best policy for your needs. Remember to work with a trusted advisor or agent to navigate the complexities and ensure you find the most suitable coverage.
