Universal Life Insurance Explained

In simple terms, a universal life insurance policy is a form of permanent life insurance that offers flexibility. It might help to consider the policy in two parts – one part provides protection for you and your family through a death benefit, and the other part offers the ability to build cash value. Death benefits under a UL policy are paid to your designated beneficiaries after your death. In general, there are three main types of universal life insurance policies: indexed universal life insurance (IUL), variable universal life insurance (VUL), and guaranteed universal life insurance (sometimes known as fixed universal life). 

With an indexed universal life insurance policy, you can build cash value based, in part, on the performance of a market index, but it’s important to know you aren’t invested directly in the stock market or an index. While there are no guarantees of a positive return, the policy can help protect against negative performance by setting a “floor,” or lower limit.  Insurers can also put a “cap,” or an upper limit, on the rate of return. It is also important to understand that these policies are subject to fees and expenses.  

One of the common questions asked by policyholders is if indexed universal life insurance is good for retirement? While the primary of purpose of life insurance is the death benefit, the cash value portion of a policy may offer a source of funds during retirement. So it’s important to consider an IUL policy as part of a financial strategy rather than the sole basis of a retirement plan. And it’s always a good idea to discuss any retirement strategies you are considering with a financial advisor or a tax expert. 

Variable universal life insurance coverage, on the other hand, allows you much more leeway in how your cash value is created – and any extra money you put into your policy is directly invested into mutual fund-like subaccounts according to an allocation you choose. Yet this could potentially result in more volatility, which could make it difficult to plan for the future.  

Lastly, guaranteed universal insurance offers guaranteed death benefits and premiums, and any cash value is based strictly on an interest rate (usually this rate is fixed, but can vary based on the particular life insurance company’s policies). With this type of policy, premiums and benefits remain the same throughout the life of the policy.  

Characteristics of Universal Insurance Policies 

In addition to lifetime protection, universal life insurance policies generally have other important features you should be familiar with, such as:

Ability to Withdraw Cash or Take a Loan 

For every premium you pay toward your universal life insurance coverage, a portion of the premium goes toward the cost of protection, and the rest goes toward building your cash value. Once your cash value has grown, you could potentially withdraw a portion of your cash value, or borrow against it. 

Various insurance companies have different timelines and requirements for doing this. Note that withdrawing the funds or borrowing against your cash value can have certain implications, such as incurring taxes and reducing the death benefit paid to your beneficiaries, so it’s important to get advice from a trusted financial or tax advisor before accessing any accumulated cash value. 

Earning Interest

If your policy is tied to an interest rate (as is typically the case with a fixed UL policy), the cash value of your policy can earn interest. The amount you earn in interest typically varies from time to time based on rate fluctuations and the company’s policy. Many insurance companies offer minimum performance guarantees on their policies.   

Flexible Premiums

Once your cash value has grown to a certain amount, you may be able to pay reduced premiums or stop paying premiums for a period of time. Some people opt to do this if they are going through financial difficulties, or if they are trying to save money for another reason.  

The option to adjust your premiums without losing your universal life insurance coverage can vary by policy and by company – just make sure you’ll be in a position to begin paying your premiums again before your policy is negatively impacted. It’s important to talk to a trusted financial advisor before deciding to take out any money from your cash value, or before you decide to adjust your premium payments. 

Wrapping Up Conclusion

A universal life insurance policy often allows you to withdraw cash or borrow against it when you have a pressing issue that requires immediate funding. This kind of policy may also allow you to earn interest and build cash value. Lastly, you may be allowed to pay lower premiums if your cash value has sufficient funds.

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