What is universal life insurance?
A universal life insurance policy, or UL, has been described as offering the low-cost death benefit of term life with a cash value component of a permanent policy.
With these types of life policies, there is a great deal of flexibility afforded to the policyholder. The premium is flexible as in term life insurance and whole life they are fixed, this means in a hard time you can miss a premium payment without lapsing the life insurance coverage as long as the policy has enough cash value. How does universal life insurance work?
How does universal life insurance work?
With universal life, a death benefit will be paid out to a named beneficiary (or beneficiaries) if the insured dies while the policy is in force.
The policyholder can also build up the cash value portion of the policy on a tax-deferred basis. This means that there are no taxes due on the gain, unless or until the policyholder surrenders the policy.
Who is a Universal Life Insurance policy best for?
Life insurance needs vary based on your financial situation. Universal life coverage can be used to pay off debts in the event of premature death. It can cover things like student loans, funeral costs, credit card debt, mortgage debt, and many other debts.
You will want to consider your personal situation and how much monthly premiums you can afford before you buy a policy. If you are looking for a policy with a low monthly premium that builds cash value then a universal life insurance policy may be the right choice for you.
Universal life insurance vs whole life
While both universal life and whole life are types of permanent life insurance, universal life is considered to be more flexible than whole life coverage. Both offer long-term protection.
One reason for this is because a universal life insurance policyholder can change the amount of their death benefit and when they pay their premiums. They can also change how many times they pay, unlike whole life insurance.
Each time that a premium is paid, the insurance company will take some of the money to cover the cost of the insurance. But it will also put some of it in your cash-value account where it will earn interest and grow tax-deferred.
In fact, the policyholder is actually able to move funds between the cash value and the fixed death benefit components of the universal life plan – and since the premiums are flexible, the policyholder can adjust the proportions of the policy based on external market conditions.
How does the cash value grow in a policy?
The cash value of a universal life insurance policy is guaranteed to grow at a minimum fixed interest rate. However, these funds may actually grow more, depending on market performance. Depending on the type of UL policy, there may be other methods of growing the cash value.
With an indexed universal life insurance policy, the return on the cash value is determined in large part by the performance of an underlying market index, such as the S&P 500. For example, if the index performs well during a given year, then the cash value is credited with a positive interest return, typically up to a set maximum, or “cap.”
If, however, the underlying market index performs poorly during a given year, then the cash value will not incur a negative return, but rather will be credited with just a 0% for that time period. So, although there is not a positive return credited at that time, the principal in the policy is still protected, regardless of what happens in the market.
Universal life policies will also have a fixed crediting option. Here, the growth of the cash value is based upon a rate that is set by the insurance carrier.
There are several different factors that will determine the premium cost of a policy. These include the following:
- Tobacco Use
- Product Type
- Coverage Amount
- Health History
- Family History
- Financial History
- Criminal History
- Medication History
- Insurance Company
- Length of coverage (for term life insurance)
The different types of policies?
There are different types of life insurance policies available in the market today. These include guaranteed universal life (GUL) and indexed universal life (IUL).
Universal life insurance is a type of permanent life insurance. It’s different from traditional whole life because it offers a death benefit that’s not guaranteed and your cash value grows based on the credit rating offered by the insurer, which can change at any time. You can make changes to how much you pay or how often you pay. You need to make sure that your policy account has enough money to cover the expenses.
Guaranteed universal life insurance, or GUL, is somewhat of a “hybrid” life insurance option that offers permanent death benefit protection like whole life insurance, but often with more affordable premiums like term life policies. A GUL policy will oftentimes have level premium rates until the insured’s age 100, or even later.
Indexed universal life insurance has its cash value component with performance tied to the return of an underlying market index. However, these policies also offer a guarantee that the value of the cash account will not fall below a zero interest rate if the index encounters a negative interest performance at any given time. This is the best type of universal life insurance policy to accumulate cash.
Likewise, an IUL policy will also typically have a “cap” on the amount of positive growth that can occur. This means that, even if the underlying market index performs very well, the return on the cash value will not rise above the set cap. Some IUL companies have no capped index options as well.
IUL vs. GUL
With an IUL policy, the return on the cash value is based in large part on the performance of an underlying market index, and because of that, the cash value in an IUL policy may grow as a GUL will have no cash value accumulation.
Do I have to Take a Medical Exam
Most universal life insurance companies will require a medical exam, but that will depend on things like how much coverage amount you are applying for and your age. We can help you determine the carriers underwriting guidelines before we apply.
Is Universal Insurance Bad
Is universal life insurance coverage bad? No, it is not bad if the life insurance policy is designed right. Although there are many benefits of owning a guaranteed universal life insurance policy, there are some options that these types of plans will not provide, such as:
- Surrender Fees
- The affordability of term life insurance
- The increasing cost of insurance
Benefits of a Universal Life Insurance policy?
Universal life insurance offers many benefits such as flexible premiums. index interest rate options, long-term protection, and many other things. In a GUL you can lock in premiums for life and have a death benefit that lasts your entire life.
The premium can often be lower than that of other permanent policies which means you can pay less for more death benefits. Flexible premiums also make this life insurance policy ideal for many people needing permanent protection.
Accessing Cash Value
Some individuals choose universal life insurance policies to build up a cash value account that allows you to borrow against the cash value with an interest-free or participating loan. This concept is called a life insurance retirement plan. There are huge tax advantages of a life insurance policy’s cash value. You have tax-free growth, tax-free distributions, and tax-free death benefit coverage.
Permanent life insurance policies have a savings component and savings that can accumulate over time. After a certain number of years, the life insurance company allows you to withdraw money or take tax-free loans from the account if you choose which can be used for tax free retirement income also known as a LIRP.
Find the best universal life insurance quote today.
If you choose a universal life policy for your loved ones we can help. We work with more than 30 of the top insurance companies in the industry today. So, there is no need to spend time and effort sorting through policies and companies when we’ve already done the legwork for you. You can compare Universal Life Insurance Quotes online with us today.
At Insurance Geek we are an independent brokerage, we will help you to narrow down policies and find the best universal life insurance quote. We will find the carrier that works best for you and your specific needs.