Universal Life is a permanent type of life insurance coverage.
Like traditional whole life insurance, it offers the cash value component of tax deductions as an investment or savings account. But unlike whole life insurance, which has fixed premiums and guaranteed returns, premiums and universal life returns can vary.
Read more about the best life insurance companies that offer long-term and long-term coverage, with expert guidance from Money.
What Is Universal Life Insurance and how does it work?
Universal Life is similar to whole life insurance, which can last a lifetime for the policyholder and has a cash value component – a savings account type that policyholders can borrow or use to pay premium payments, but Universal Life offers more affordability Affordable, and flexible premiums.
Let’s take a closer look at how these policies compare to each other and the more affordable life insurance options, term life insurance :
Term life insurance whole life insurance Universal Life Insurance
Provides coverage for some time or “term” (10, 20, 30 years). Guaranteed returns with permanent insurance and cash value. Permanent coverage, but cash value returns are not guaranteed.
Features are much lower than permanent life. Costlier life insurance options, but with fixed premiums for the life of the policy. Offers flexible premiums that can be more affordable than entire life.
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Elements of a Universal Life Insurance Policy
Similar to whole life insurance, universal life insurance has two main components: a death benefit and an investment or savings account called cash value.
Let’s explore these and other elements of universal life insurance in more detail.
Qualified
Eligibility requirements for universal life insurance vary by the insurance company. However, most insurance companies require a medical exam.
Physical examination may include:
- physical inspection
- Lifestyle and Health Issues
- Information about prescription drugs
- Access your medical records
- View credit card and DMV records
Misrepresenting or concealing your medical history, weight, lifestyle, or habits on a life insurance application form may be considered a material misrepresentation, resulting in the cancellation of the policy or the denial of a beneficiary’s death benefits claim.
Types of Universal Life Insurance
Traditional, indexed, guaranteed and variable universal insurance policies offer different investment options and terms to suit different needs and risk tolerance levels.
index Changing guarantee
Cash value and market index steps appreciate, boost, and lose. Allows policyholders to link the value of their cash to gains (and losses) in bonds, stocks, and mutual funds. Guaranteed premiums will never increase.
Gives policyholders more control over their investments. The most flexible general policy option. Safest general policy option.
Riskier than traditional life insurance. Requires personal management. Investment accounts rarely generate cash value.
Override duration
Most universal life insurance products have an “expiration date,” which could be your 105th birthday or your 121st birthday. Some policies may have an expiration date as low as 85 years, so read the contract carefully before buying coverage.
If you reach your policy’s due date for a long time, you will receive a one-time payment equal to the cash value of your policy. If you pass before the due date, your beneficiary will receive the policy’s death benefit.
Death benefit
Tier Death Benefit Increase in death benefit
The beneficiary receives a death benefit equal to the face value of the policy, while the insurance company retains the policyholder’s accrued cash value. The death benefit received by the beneficiary is equal to the face value of the policy plus the accrued cash value.
A key factor affecting life insurance premiums is the number of death benefits. Simply put, there are more policies with higher mortality benefits.
Upon the death of the insured, the insurance company will deduct any outstanding loan balance from the death benefit amount. Any interest on the outstanding loan will also be deducted from the remaining cash value.
cash value account
Like whole life insurance, universal life insurance has a savings account component called cash value.
When you pay your premiums, part of this money goes to pay the death benefit and the other part goes to the cash value.
Since the cash value of an indexed and variable universal policy follows stock market investments, the balance may fall if stocks and securities perform poorly, but it may also grow faster than a whole life insurance cash-value account.
However, the gain cap is a percentage of the actual return on the investment, and the loss is 0% – meaning the balance will never fall below the total principal of the account.
How to use the cash value of your policy
As a policyholder, you can use the cash value in several ways:
- Pay Premium Payments: Use the proceeds from the investment account to pay your premiums in full or in part.
- Withdrawal: Withdraw money from the cash value of the policy. Different tax treatments may apply to whether you start from the base (which you pay into) or excess cash (which accumulates over time).
- Borrow against cash value: Take a tax-free policy loan from a cash-value account, but if you pay off the loan without interest, the insurance company will deduct the outstanding loan balance from the policy’s death benefit. If the death benefit is not enough to cover the loan, the policy will fail.
- Insufficient cash: Cancelling insurance later in life, cashing out the value of the policy. Typically, you pay a surrender fee and then pay income tax based on the surrender value of the policy.
- Donation: Donate the entire policy to a charity or foundation.
How much does Universal Life Insurance cost?
Universal life insurance premiums start at around $55 per month, according to Business Insider.
However, factors such as your age, health history, pre-existing conditions, occupational risks, driving history, lifestyle, hobbies, and the chosen death benefit amount will all affect the cost of your policy.
Life insurance premiums increase with age. If you use the cash value of your universal life insurance policy to pay your premiums, you run the risk of not having enough cash value to pay a higher premium.
Missed premium payments may cause coverage to lapse.
underwriting process
The underwriting process begins after submitting an insurance application. To determine the final premium, each insurance company has underwriting guidelines for specific requirements.
When calculating your life expectancy and premiums, underwriters can consider the following factors:
- age and gender
- Height and weight
- Medical and Prescription History
- Country of Citizenship
- address
- Tobacco use
- Occupation and Employers
- income
- Other insurance policies
- Hobby
- criminal history
- travel abroad
Rider
The rider is an optional benefit not included in your life insurance policy. You can purchase riders to adjust your policy to suit your needs.
The most common passengers include:
- Premium Waiver: If you become disabled at a specified age (around 60-65) and cannot pay your premiums, the policy will remain in force.
- If the insured dies in an accident, pay the additional funds to the beneficiary’s additional funds.
- Disability Income: If the insured is disabled, the insurance company provides monthly income for as long as the disability lasts.
- Additional Coverage: Provides coverage for other family members, such as spouses or children.
- Accelerated Death Benefit: In the event of a terminal illness, the insured may receive some or all of the death benefit before death.
- No-Break Guarantee: Keeps your policy valid for as long as it doesn’t lapse, even if the cash value drops to zero.
What would cause a claim to be denied?
While it’s rare for a life insurance company to deny a death benefits claim, it can still happen.
Here are some common reasons for life insurance claim denial :
- Incorrect or incomplete information provided during the application
- Suicide during the disputed period (usually the first two years of the policy)
- Failure to pay premiums
- Alcohol or drug use before death
How to Buy Universal Life Insurance
Before you buy universal life insurance, consult a financial planner and a registered insurance agent. They can guide you to find the best insurance plan for your needs.
To learn more about the types of life insurance on the market, check out Money’s pick of the best life insurance.
Is Universal Life Insurance Right for You?
Universal Life is an option for high-income earners:
- Having exhausted other retirement savings options like 401k, IRA, and Roth IRA accounts.
- Whether there are long-term dependents, such as adult disabled children or parents requiring long-term care.
- Want to pay state taxes for their heirs.
- Choose flexible premium instead of fixed premium whole life insurance.
- Never mind that growth in cash value is usually tied to the market, which will determine the income of the account.
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How much universal insurance do you need?
The amount of life insurance you purchase should be based on your financial plan.
Some insurance agents recommend buying coverage worth 10 to 15 times your annual salary. However, this should depend on what you want to give your policy to and your financial obligations.
If you’re looking to buy insurance for your loved one as an income replacement, don’t forget to consider the following:
- The number of years your beneficiary needs to replace income
- outstanding debts, such as your mortgage balance
- Future expenses, such as college tuition for dependent children
How to reduce premiums?
You can reduce the cost of the premium by:
- Reduce the amount of death benefit payments
- Use the cash value to pay some or all of your premiums
- Check your policy regularly to see if it still meets your needs
How do you choose the right insurance company?
Before choosing an insurance company and policy, consider the following:
- Get quotes from different companies and compare quotes to make a decision
- Narrow your options down to financially stable companies
- Consider policy options, including investment opportunities for permanent living
- Get a complete, honest look at your health history
- Research Ratings and Reviews
Universal Life Insurance FAQ
What factors determine my premium?
Your life insurance premium will depend on your age, health history, gender, occupation, lifestyle, and habits, as well as the type of policy and amount of coverage you choose.
Life insurers have different underwriting guidelines, which means they don’t all assess risk differently. Shop around for quotes from some life insurance companies to get the lowest possible premiums, as well as other policy features that are important to you.