What is Universal Life Insurance? Pros, Cons and Cost

If you require life insurance that will last your entire life, develop cash value, and provide payment and death benefit flexibility, a universal life policy may be worth considering. However, this level of coverage is not suitable for everyone. Before you begin shopping for universal life insurance, learn more about its advantages and disadvantages. 

What is universal life insurance?

Universal life insurance is a sort of permanent life insurance that provides long-term coverage and generates cash value over time. Policies are normally valid until a specific age, such as 95 or 120. This coverage provides flexibility that other permanent policies, such as whole life insurance, do not. For example, you can change the amount you pay in premiums, which may appeal to people with variable incomes.

How does a universal life insurance policy work?

Universal life policies work similarly to other permanent policies. In exchange for premiums, you normally receive lifelong coverage, with a payout to your beneficiaries when you die. You can also accumulate cash value and take out loans while you’re still alive.

However, universal life insurance has distinct characteristics that distinguish it apart from other types of coverage.

Universal life insurance cash value

When you pay a premium, the insurance company deducts both the cost of the insurance and any administrative expenses. The remainder is added to your policy’s cash value, which might increase over time based on an interest rate determined by the insurance company. Universal life policies have a guaranteed minimum interest rate.

Universal life insurance premiums

The biggest advantage of universal life insurance is the option to alter your premiums. You may pay more than the minimal premium, up to a specific maximum, and the excess money — minus any administrative fees — are deposited into your cash value.

Alternatively, you may pay less than the minimal premium. If you do this, make sure you have enough cash value to cover the cost of insurance and other expenses; otherwise, your coverage may lapse.

Universal life insurance death benefit

You normally have the option of reducing your life insurance death benefit, which is useful if you no longer require as much coverage. Some insurers may allow you to enhance your coverage, although this is not as typical.

In general, there are two kinds of death benefits to select from:

• Level death benefit. In most circumstances, the death benefit amount remains constant during the term of the policy. For example, if you buy $100,000 of coverage and accumulate $60,000 in cash value, your beneficiaries will receive $100,000 upon your death.
• Increasing death benefits. Your cash value balance is applied to the death benefit. So, in the prior example, your beneficiaries would receive $160,000, which included both the death benefit and the cash value. This option carries greater premiums.

Universal life insurance: Pros and cons

If you’re looking for a permanent life insurance coverage but don’t want to pay exorbitant premiums, universal life insurance has a lot to offer in terms of flexibility and possible returns. However, there are some disadvantages.

Weighing the benefits and drawbacks of a universal life policy will help you determine whether this type of insurance is right for you.

Universal life insurance vs. whole life insurance

Whole life policies, like universal life insurance, provide permanent coverage that can last your entire life. However, unlike universal life insurance, whole life policies include fixed premiums and death payments, as well as assured cash value growth. So, if you want long-term coverage that you don’t have to constantly monitor, whole life may be the easier alternative. If you wish to change your coverage and premium payment over time, consider universal life. 

How much does universal life insurance cost?

Here are the average annual premiums for a $500,000 universal life coverage versus whole life.

Note that this is not an apples-to-apples comparison because the policies behave differently. For example, universal life insurance does not guarantee cash value increase, whereas whole life policies do, making them more expensive.

Universal life vs. whole life insurance rates for men

Universal life vs. whole life insurance rates for women

Other types of universal life insurance

There are three different types of universal life policies to examine.

• Guaranteed universal life insurance does not require the same level of involvement as ordinary universal life insurance and is frequently referred to as a middle ground between term and whole life. It offers lower interest rates because the cash value growth is small.
• Indexed universal life insurance works similarly to a regular universal life policy, but the cash value is determined by the performance of stock indexes such as the S&P 500 and Nasdaq composite. If you do not designate alternative investments, the cash value may be placed in a fixed account.
• Variable universal life insurance offers a cash value component that can be invested in any sub account of your choice. It has bigger potential profits and losses, thus it carries more risk.

Universal life policy riders

There are many riders that your insurance provider may provide for a universal life policy. Life insurance riders are optional features that can be added to your policy to make it more personalized. They may include coverage features or guarantees, but they are usually optional or come with an additional price.

• No lapse guarantee. Even if your cash value lowers, your death benefit will remain in effect as long as you pay the annual amount required to preserve the guarantee, which may be greater than the reported minimum premium to keep the policy in operation.
• Insurance costs are waived. This suspends premium payments if you become handicapped. The waiver of premium rider keeps your insurance active, but no funds are added to the cash value.
• Accelerated death benefit. If you are diagnosed with a terminal, critical, or chronic illness, you can get some or all of your death benefit while still living. The rider’s provisions differ by insurance, so check to discover which ailments are covered and how much your insurer’s accelerated death benefit pays out.
• Family riders. Child term riders and spouse riders enable you to extend coverage for extra family members to your universal life insurance.
• Accidental death. An accidental death benefit rider boosts your policy’s payout if you die in or as a result of an accident.
• Guaranteed insurability. This allows you to boost your policy’s death benefit at specified life stages or policy anniversaries without having to have an exam or fill out a health assessment. For example, a guaranteed insurability rider may raise your death benefit when your child is born, even if you have a medical problem.

How to find the best universal life insurance company

Universal life insurance are complex, so to pick the right company, focus on the following three factors:

• Financial strength. You’ll want a financially stable life insurance company so you know your cash worth is safe and your beneficiaries will receive a payout when you die. In most situations, AM Best or S&P Global Ratings can provide financial strength ratings for life insurance firms; however, a free login may be required to check.
• Policy types. You should hunt for a firm that provides the insurance options you’re looking for; the riders listed above may not be available from all companies. Universal life plans can be sold with a variety of guaranteed premium levels and fee structures.

Expert advice. Finally, it’s a good idea to consult a fee-only life insurance expert, which you can typically discover by conducting an online search. These specialists can assist you better comprehend the differences between the company’s goods.