What You need to Know about the Types of Universal Life Insurance
There are a few main types of universal life insurance: Flexible premium, fixed premium and single premium. Flexible premium is the most common, as universal life policies are known for the flexibility they offer policyholders to adjust the size and timing of their payments.
Universal life also gives policyholders the ability to add optional riders to the policy – for example, a “no lapse guarantee” or other features to increase coverage and manage risks.
Flexible Premium Universal Life
This is the most common type of universal life insurance. With flexible premium universal life, policyholders can choose the amount and timing of their premium payments, or even skip payments altogether as long as there is enough money in the cash value account to cover the premium amounts. Premium payments have to fall within a minimum and maximum level that is agreed upon in advance and defined within the policy’s contract.
Flexible premiums are a great benefit to people whose income varies from month to month, because instead of having to pay a bill every month (like a fixed premium plan), policyholders can make extra payments when money is plentiful, and skip payments during the times when money is tight.
One possible complication of flexible premiums is that it requires policyholders to pay attention to the details of their policy. If a policyholder is going to skip payments, it’s important to know how much money is left in the cash value – if not enough money is available to cover the payments, the policy might lapse, leaving the beneficiaries without benefits if the policyholder dies.
Policyholders who want a flexible payment schedule while avoiding the risk of losing coverage should consider buying a “no lapse guarantee” rider for the policy, as this will create extra protection.
Fixed Premium Universal Life
Most buyers choose universal life insurance for its greater flexibility in premium payments, but there is also the option of choosing fixed premiums, payable on a regular basis in a set amount. Fixed premiums can be made for the life of the policy or for a pre-determined timeframe – for example, a policyholder could decide to make fixed payments for the first 5 years, and then be able to choose a more flexible schedule from that point forward.
Even with a fixed premium arrangement, the universal life insurance policy would still have the other flexible features such as modifying the death benefit and cash value amounts. The advantage of a fixed premium universal life policy is that it avoids putting the policyholder at risk of losing coverage due to skipped payments – unlike a flexible premium plan, a fixed payment schedule ensures that the payments get made on time and in full.
Fixed premium universal life gives policyholders a choice offering slightly less flexibility, but more security – and every policyholder needs to find the right balance that works for them and their family.
Single Premium Universal Life
Instead of paying premiums every month or on a flexible schedule, universal life insurance can also be paid up all at once, in single, large premium payment. This type of policy is often used as place to put money for savings, tax planning or as part of estate planning.
Policyholders might choose this type of universal life insurance if they have money that they want to shelter from taxes using the tax-deferred savings advantages of the cash value account, and are not be eligible for other tax-deferred savings vehicles.
Optional Riders for Universal Life
One risk of universal life insurance is that if the policyholder skips too many premium payments, the insurance coverage might lapse. To help avoid this situation, some policies offer a “no lapse guarantee” and other riders to offer additional protection against losing coverage in case premium payments are missed, or in case the cash value falls below a certain level. This is one of the most common types of riders for a universal life policy.
Other types of riders include:
- Acceleration riders, which give the policyholder the ability to draw down advanced payments from the death benefit in order to pay for long-term care or other qualifying expenses.
- Accidental death benefit riders, which double or triple the amount of death benefit in case the policyholder dies in an accident.
- Children’s term riders which enable the policyholder to purchase term life insurance for qualifying children.
- Enhanced disability riders, which reduce the policyholder’s premium payments in case the policyholder becomes completely disabled.
- Extension riders, which provide long-term care coverage in addition to the amount of death benefit coverage.
The types of riders available are different depending on the insurance company and depending on the individual policy. Some riders can be added at any time during the life of the policy, while other riders must be purchased in advance. And some policyholders will not qualify for certain riders due to health reasons or limitations agreed to in the existing policy.
Who Should Buy Universal Life Insurance
Universal life insurance is the best option for people who are prepared and eager to manage the details of their insurance policy, in a way that would not be required in a traditional whole life policy or other types of insurance.
Whole life insurance is largely a “hands off” policy – the details are established on the day contract is signed, and as long as premiums are paid on time, the policy stays in effect and the policyholder will have insurance coverage and a growing pool of cash value.
Universal life insurance is much more “hands on.” It requires policyholders to stay engaged and aware about the details of their policy – what is the current cash value, what is the minimum payment amount, what happens if I want to lower my death benefit? Policyholders have more responsibility to stay current on payments and ensure that their policy does not lapse.
Regardless of the type of universal life insurance, policyholders need to understand that they are assuming a greater degree of risk and responsibility than they would have with a typical whole life insurance fixed premium policy. Universal life insurance offers many advantages in terms of flexibility and adaptability for different financial needs and goals, but policyholders need to be vigilant in paying attention to the details of their policies and upholding their obligations to keep the policies in effect.
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