The Features of Universal Life Insurance
Universal life insurance is a type of permanent life insurance that offers several features in common with whole life insurance, and a few major differences:
- Permanent coverage
- Pays a death benefit
- Earns cash value
- Flexible benefits, payments and terms
- Changing coverage for changing needs
- More affordable than whole life insurance
- More freedom and more responsibility
Like whole life insurance, universal life insurance remains in effect for the duration of the policyholder’s entire life – it is not limited to a specific term of years. No matter how long the policyholder lives, the beneficiaries will receive the financial protection of the death benefit.
Pays a Death Benefit
The primary reason to buy life insurance is to protect loved ones in the event of the policyholder’s death – and universal life insurance offers death benefits, just like all other types of life insurance. The difference with universal life insurance is that the death benefit can vary depending on the policyholder’s preferences – while the death benefit is guaranteed not to fall below a certain level, it also is not permanently fixed like with a whole life insurance policy.
Earns Cash Value
Just like a whole life insurance policy, universal life insurance policies earn cash value that grows over time. (This is different from a term life insurance policy, which only provides a death benefit and does not accrue any cash value.) As is the case with whole life insurance, the cash value of a universal life insurance policy is invested in low-risk funds. The interest rate on a universal life insurance cash value account is guaranteed to stay above a certain defined level.
One of the biggest differences between universal life insurance and whole life insurance is that with a universal life insurance policy, the cash value is not guaranteed and can be adjusted at any time depending on the preferences of the policyholder.
If a policyholder wants to use his accrued cash value to pay premiums (thus avoiding the need to write a check each month), or adjust the timing of the premiums (skipping several months’ worth of payments, if desired), or change the value of the death benefit (by effectively buying more insurance in exchange for a lower cash value), all of these changes are possible with a universal life insurance policy.
Flexible Benefits, Payments and Terms
This is the biggest difference between universal life insurance and whole life insurance. With whole life insurance, premiums are fixed, cash values and death benefits are guaranteed, and all the policyholder has to do is make the monthly premium payments.
Universal life insurance is more complex than whole life insurance, but also more flexible for the policyholder. Universal life insurance policies allow the policyholder a great degree of freedom in how to use the policy and its cash value. Policyholders can skip premium payments (drawing down the cash value instead), lower the policy’s death benefit (to boost the cash value) or alter the timing of their premium payments.
Policyholders can also increase the death benefit of their universal life insurance policy, but this often requires answering medical underwriting questions or going through a health checkup to confirm that the policyholder is not at risk for imminent health problems.
Changing Coverage for Changing Needs
Universal life insurance allows policyholders to adjust their insurance policy to suit their goals and changing needs for every stage of life. This is another big difference from whole life insurance, which is “set in stone” at the policy’s effective date and cannot be changed – the death benefit, cash value and premium amounts are all fixed.
For example, a young couple (age 25) with a baby on the way might want an insurance policy with a larger death benefit – their first priority might be to provide financial protection to help raise a child in the event of a parent’s death.
But consider this same couple a few years down the line – age 50, the baby is now an independent adult, and the couple is thinking about retirement. Instead of sticking with the same level of death benefit that they wanted when they were 25, this couple might want to lower their death benefit and boost the cash value of the policy.
With whole life insurance, this couple wouldn’t have that option – they’d be forced to stay with the benefit arrangements that had been made many years earlier, at a very different time in their lives. Universal life insurance gives couples like these the freedom and flexibility to adapt their life insurance to suit their changing needs.
More Affordable Than Whole Life Insurance
Universal life insurance premiums are often more affordable than the premiums for a similar amount of whole life insurance coverage. One reason why premiums are more affordable is that the universal life insurance product has certain complexities and risks that are the responsibility of the policyholder – it’s more of a “hands on” product that requires the policyholder to be more actively engaged in managing and being aware of their policy details. Whole life insurance premiums are higher because the product largely “takes care of itself.”
More Freedom and More Responsibility
One of the biggest differences between whole life insurance and universal life insurance is that a universal life insurance policy has a higher risk for the policyholder: if a policyholder fails to make sufficient payments to keep the cash value above a certain level, the insurance policy might lapse – resulting in a loss of the death benefit for the policyholder’s beneficiaries.
To avoid a lapse in coverage, universal life insurance policyholders need to be vigilant – they need to stay up-to-date on the status and details of their policies. If universal life insurance policyholders skip too many payments or fail to monitor the balance of their cash value, they could be putting themselves at risk of losing their coverage.
Universal life insurance offers some valuable flexibility for policyholders to manage their payments and adjust their coverage levels to suit their changing needs – but this freedom comes with added responsibility.
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