Universal Life Insurance Policies Explained

Universal life insurance is a type of permanent coverage that stays in effect for the lifetime of the policy owner. To keep it current, you need to make your regular premium payments promptly and make sure that if you take a loan or a withdrawal from the policy, enough cash value remains to keep the policy in effect.  

When you apply for a life insurance policy, you will need to provide some medical information. This is often collected online via the health questions on the application, although in some cases this will require an in-person visit with a health professional. You’ll also need to choose your beneficiaries. Providing your beneficiary information is important so you can ensure the right people receive the death benefit when you pass away. Apart from protecting the welfare of your family and loved ones after you’re gone, a UL product can usually build cash value. Simply put, cash value is the portion of your policy that earns interest. 

This way, you can earn some extra money within your insurance policy, which can help you take care of yourself and your family while you’re still alive. Unlike other types of insurance policies, a UL policy is quite flexible in terms of adjusting premium payments – as long as you continue to meet the required minimum payment outlined in your particular policy. 

For example, if you were to lose your job or have another type of financial emergency and you couldn’t afford your current premium, you might be able to use your existing cash value to pay your premiums until you’re back on your feet. However, it’s important to note that it usually takes some time for a product to accumulate cash value. The longer you save, the more money you can accumulate. 

Yet policy owners should also understand that using your cash value to help pay premiums will reduce the overall cash value. And, it’s important to understand how much cash value you have to access – if you are relying on your cash value to pay your premiums and deplete the cash value, there is a danger your policy might lapse. It’s important to be proactive and understand how your policy works. You should consult with your insurance agent on the parameters of the policy and ensure you understand how to access cash value and any restrictions or limitations. In most cases, if you have exhausted your cash value and you still can’t pay premiums, your policy will lapse and your coverage will end. 

How Are Universal Life Insurance Premiums Calculated?

Here are the main considerations your insurer will take into account when calculating how much someone pays for their policy:

Life Insurance Death Benefit

The death benefit is what the insurance company pays to your beneficiaries when you die. This is usually paid in a lump sum, and is tax-free in most cases. Typically, the larger your death benefit, the more you will pay for your policy. For example, a policy that offers a $100,000 death benefit would be less expensive than a policy that offers a $500,000 death benefit. Death benefits (also called face amounts) are generally limited based on income. 

Some insurance companies offer two different kinds of death benefits – level and increasing. A level death benefit, as you might expect, stays the same throughout the life of the policy. An increasing death benefit means that the death benefit could increase based on any cash value that accumulates over the course of the policy. (Of course, this assumes the policy owner hasn’t taken any loans or withdrawals from the policy that might impact the death benefit.)  

Health and Age

Your insurer will consider your current health condition and age to determine how much you should pay in UL premiums. If you have a chronic medical condition or have a lifestyle that puts your life at greater risk or if you’re in your twilight years, your premium will be higher than that of a young, healthy policyholder with no risky habits or hobbies. And in some cases, a specific medical condition could make someone ineligible for coverage. Each product offered by an insurance company has specific issue ages (for example, if issue ages are 18-50, a 55-year-old would not qualify). Insurance companies also have specific underwriting requirements when considering the individual health status of an applicant. 

Moving Forward

Simply put, universal life insurance is a permanent life insurance policy that offers flexible premiums and benefits. With this policy, you can adjust your premiums (provided the minimum payments are made), grow cash value, and withdraw or borrow cash from your policy. However, it’s always a good idea to seek advice from an experienced life insurance agent or financial advisor before taking any of these steps to avoid creating issues that may be detrimental to your future plans.