Broadly speaking, life insurance comes in two different forms. You can either buy term life insurance coverage that only lasts a specified number of years, or you can opt for permanent coverage intended to last the rest of your life (or at least, well into your older years).
When shopping around for the latter, you will likely come across a type of coverage called universal life. This coverage, also referred to as cash value life insurance, offers the security of a typical death benefit along with the added assistance of an interest-bearing savings account.
Knowing that, is universal life insurance right for you and your family?
How Universal Life Insurance Works
As noted above, a universal life (UL) policy is intended to last the rest of your life. As long as you continue making payments, your coverage will stay in effect — whether you die at 45 or 95.
Typical of most life insurance products, universal life allows you to select the death benefit amount that best suits your family’s needs. You can usually choose between a number of different policy riders as well, which offer additional protection for you and your loved ones.
The difference between term life coverage and a permanent policy like universal life is the cash value component.
A universal life insurance policy builds up what is called a cash value, which can grow along with typical market rates. This accumulated cash value is an asset that you can withdraw or borrow from while your policy is in effect, whether you’re looking to buy your first home, pay for a child’s college tuition, or save funds for retirement.
Types of universal life insurance
Some universal life policies earn standard interest while others are indexed, growing alongside well-known indexes (think S&P 500 or Nasdaq 100). Some policies last for life, but don’t build up a cash value or earn interest at all (such as a guaranteed universal life policy, or GUL).
The primary types of universal life insurance include:
- Indexed universal life (IUL)
- Variable universal life (VUL)
- Guaranteed universal life (GUL)
It’s important to compare all of your policy options, as the coverage, terms, and cash values will behave differently with each.
Each month (or quarter, or year) when you pay your IUL or VUL policy premiums, a portion of your payment will cover the cost of your death benefit while the rest will go toward your policy’s cash value. Depending on the type of universal life policy you have, this cash value will either earn interest at a fixed rate, grow along with the market, or earn indexed returns.
Your contribution to the cash value of your IUL or VUL policy is flexible. Because of this, universal life policy premiums can typically be adjusted over time if desired. If you decide you want to save even more, you can increase your premiums; if you need to lower your contribution at any point, you can generally do so, as long as you continue making the minimum required payment.
Depending on the policy and how long you’ve been building the cash value, your carrier may allow a number of premium payments to be made directly from the savings you’ve accumulated.
Down the line, you may even decide that you no longer need your universal life coverage. If this happens, you can surrender your policy for cash value, rather than walking away empty-handed after decades of paying premiums.
Benefits of Universal Life Insurance
There are many reasons to consider purchasing a universal life insurance policy from a trusted carrier. We already mentioned most of them, but they include:
- Cash value growth — An IUL or VUL policy combines a death benefit with cash value growth. You’ll be building a savings safety net without any extra effort, which you can withdraw or borrow from for any number of reasons. (Note: GUL policies do not build a cash value.)
- Flexibility of premiums — Unlike term and whole life insurance, universal life policies offer flexible premiums. If you want to increase your cash value contribution, you can raise your premium; if you need to lower your premium, you can do so as long as you’re meeting the minimum cost for your policy’s death benefit.
- Adjustable death benefit — Some carriers will allow you to increase or decrease your policy’s death benefit. If you decide over time that you need more (or less) coverage, you can alter the death benefit amount in some instances (premiums will change accordingly).
- Ability to surrender your policy — If you decide that you no longer need (or want) to continue paying for UL coverage, you can surrender your policy to your carrier in exchange for a cash value settlement.
- Coverage for life — Universal life policies are intended to cover you permanently, or at least until a specific older age. Rather than renewing a term policy, universal life allows you to lock in coverage for longer.
Downsides to Universal Life Insurance
Of course, universal life isn’t for everyone. There are a few notable downsides to keep in mind before you buy a policy:
- You’ll usually pay more — Universal life insurance is generally three to five times more expensive than term insurance with the same level of coverage. Be sure that your budget can sustain the premiums of universal life for the foreseeable future, before you sign the dotted line.
- Withdrawals may involve interest — If you’re borrowing money against your own policy’s cash value, you may have to pay interest on the loan. And if you choose to withdraw funds (and not pay them back), that amount will be deducted from your policy’s death benefit.
- Cash value is lost if you die — When you pass away, your beneficiaries will receive your policy’s agreed death benefit. However, your carrier will absorb any of that remaining cash value you may have built up over the years.
- Surrendering loses value — If you decide to surrender your policy for cash, just know that the amount will be lower than your policy’s actual cash value, as you’ll pay certain fees and receive what’s known as a surrender value.
If you are looking for permanent life insurance coverage, universal life will be something to consider along with whole life. This type of policy might make sense if you’re looking for flexible coverage and premium options, while also building up a cash value that you can draw from later in life.
Wondering if universal life insurance is right for you? LeapLife can help guide you.
Our platform can match you with personalized coverage for your loved ones through one of our trusted A-rated (or higher) life insurance partners. Our agents are also available by phone if you have questions or need help building the individual policy that works best.