Understanding Universal Life Insurance: A Comprehensive Guide

Universal life insurance is a type of life insurance that remains in effect for your entire life, as long as you pay the premiums. It’s a good option for those who want a flexible policy that builds cash value, but there are some risks to consider before you buy a policy. Here’s what you need to know.

What Is Universal Life Insurance?

Universal life insurance is a type of permanent life insurance that offers lifelong coverage, built-in savings, and flexible policy options. The policy lasts your entire life (or up to 99 years, depending on the provider), as long as premiums are paid.

How Does Universal Life Insurance Work?

One of the key features of universal life insurance is its flexibility. It offers the ability to adjust premiums and death benefits, within certain limits. You can lower your monthly premium, for instance, to accommodate changes in your monthly income. Or, you can adjust the death benefit to meet your coverage needs.

Over time, universal life insurance policies build cash value, which earns interest at a rate determined by the insurance company. You can take withdrawals or borrow against your cash value, or even use it to offset premiums. However, tapping into your cash value lowers your policy’s death benefit and can even cause your policy to lapse if it runs out of money.

Pros and Cons of Universal Life Insurance

Universal life insurance offers flexibility and benefits, but also has risks and drawbacks. Exploring the pros and cons can help you determine whether universal life insurance might meet your needs.

Pros of Universal Life Insurance

• Lifetime coverage: Universal life typically provides coverage for your entire life, regardless of age or health. Your policy never expires as long as you’re paying the monthly premiums and there’s enough cash value.
• Cash value accessibility: The policy’s cash value is an asset that accumulates over time. You can make withdrawals or take out a policy loan without a credit check. If you have enough, cash value can even be used to help with premiums.
• Long-term interest growth: The cash value balance grows over time based on an interest rate set by the insurance company.
• Flexible premiums: You have the option to raise or lower your premiums as needed, adapting the policy to your finances. Lowering your premium may impact the cash value in your policy, however.
• Customizable death benefit: You can adjust the death benefit amount depending on your coverage needs. Note that increasing the death benefit may require a new medical exam.

Cons of Universal Life Insurance

• Significantly more expensive than term life: Term life insurance doesn’t provide cash value, and thus is much less expensive than universal life insurance.
• Potential premium increase: The cost of insurance can increase over time. You may have to pay higher premiums later if the policy’s cash value doesn’t cover these expenses. This can make your policy less affordable.
• No guaranteed death benefit: Adjusting your premium and accessing cash value can affect your death benefit amount, potentially decreasing the financial protection your beneficiaries receive.
• Risk of policy lapse: Using your cash value to cover premiums or other expenses can cause your policy to lapse. If the cash value reaches zero and premiums aren’t paid, the policy may be canceled. You’ll lose coverage and forfeit premiums paid.
• Complex features and terms: Universal life insurance can be difficult to understand with various fees, options, and features to navigate. Mismanaging your policy could lower the cash value or lead to policy lapses.
• Interest rate isn’t guaranteed: Interest rate changes could affect interest earned on your cash value. In addition, outstanding loans lower your accumulated cash value and may affect your cash value performance.
• Potential taxes on loans: If your policy lapses or is surrendered, outstanding loans may be subject to taxes.

Alternatives to Universal Life Insurance

Universal life insurance isn’t for everyone. Fortunately, there are other types of insurance that may better fit your needs and risk tolerance.

Whole Life Insurance

Similar to universal life insurance, whole life insurance is also a type of permanent life insurance. Whole life insurance offers guaranteed premiums, death benefits, and cash value accumulation, but you cannot adjust your benefit amount or premiums without taking out a new policy. While premiums are higher than with universal life, cash value grows at a fixed interest rate, offering stability and predictability.

Term Life Insurance

For a much lower monthly premium, term life insurance provides coverage for a specific time period, usually 10, 20, or 30 years. Unlike universal life insurance, term life insurance does not accumulate cash value and provides only a death benefit. Term life insurance is more affordable, but coverage is temporary.

Rider Options

These additional provisions allow you to customize protection on your existing policy rather than purchase a separate life insurance policy. You can add riders for specific needs like premium waivers, automatic death benefit increase, or long-term care coverage.

The Bottom Line

Universal life insurance can be a good option if you want lifelong coverage with flexibility. If you’re considering universal life insurance, work with an experienced life insurance agent or trusted financial advisor to determine the best policy and options for your needs.

In addition to factors like age and health, your credit could be used to determine your life insurance rate. Check your credit score to see where you stand before shopping for insurance. Improving a low credit score could help you land a more affordable insurance rate.

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