Universal Life Insurance: A Flexible Approach to Coverage
Universal life insurance is a type of permanent life insurance that offers more flexibility compared to whole life policies. Unlike whole life, which has fixed premiums and death benefits, universal life allows policyholders to adjust these elements based on their changing circumstances. This adaptability, combined with a cash value component, makes it a popular choice for those looking for investment options within their life insurance.
What is Universal Life Insurance?
Universal life insurance provides coverage for your entire life, provided you pay the premiums. It combines a death benefit with a savings component that accumulates cash value over time. The cash value grows based on interest rates, stock indexes, or subaccounts, but it’s important to monitor the account to ensure it doesn’t become underfunded.
Several life insurance providers offer universal life policies. Some popular options include solutions from Northwestern Mutual and Pacific Life.
How Does Universal Life Insurance Work?
As you pay premiums, a portion goes towards a cash value that grows over time due to interest, market performance, or other investment strategies. This cash value can be used to pay premiums, take out a loan, or supplement retirement income. Upon the policyholder’s death, beneficiaries receive a tax-free death benefit. Generally, any remaining cash value does not transfer to the beneficiaries.
Types of Universal Life Insurance
There are three main types of universal life insurance policies:
- Indexed Universal Life Insurance: This type of coverage has investments tied to a stock market index, such as the S&P 500. Gains and losses are usually capped.
- Variable Universal Life Insurance: This allows you to manage subaccounts invested in stocks and bonds, with the potential for higher returns and losses.
- Guaranteed Universal Life Insurance: Premiums and death benefits are fixed, and the policy builds less cash value. The policy will lapse if you miss payments. The policy ends at a specified age, often over 90.
The best type of policy for you will depend on your budget, tolerance for risk, and financial goals.
Benefits and Drawbacks of Universal Life Insurance
Choosing a universal life insurance policy involves considering several factors:
Benefits:
- Coverage that lasts your entire life.
- A cash value component which can either be invested by the policyholder or the insurance company.
- Flexible premiums allow payments to be adjusted.
- Flexible death benefits can be adjusted to match your specific needs.
- Cash value grows tax-deferred, and the death benefit is generally tax-free.
Drawbacks:
- Premiums are generally more expensive than term life insurance.
- Building cash value is not guaranteed.
- Higher fees, especially with variable universal life insurance.
- These policies can be complex, and you may need to track your investments.
Universal Life Insurance FAQs
What is universal life insurance?
Universal life insurance is a form of permanent life insurance that allows you flexibility to change your premiums and death benefits. It also includes an investment element.
What are the disadvantages of universal life insurance?
Universal life insurance can be pricier than level term life insurance. Investing in the market increases the likelihood that your policy may lapse.
How much does universal life insurance cost?
A 40-year-old male non-smoker can expect to pay between $103 and $150 per month for a $250,000 policy. The average cost may fall between $83 and $130 per month for females the same age.
Is universal life insurance worth it?
If you are seeking a flexible approach to your coverage and the ability to build wealth, this insurance may be a good fit. Term life could be a wiser choice if you want a cost-effective way to protect your family during your peak earning years.
