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Universal life insurance is a permanent policy that doubles as an investment product. It works in a similar way to other permanent policies — but it’s unique in terms of its flexibility and the way the cash value grows.
What's in this guide?
- What is universal life insurance?
- How does universal life insurance work?
- Pros and cons of universal life insurance
- Is universal life insurance right for me?
- Compare life insurance providers
- Traditional universal life insurance vs. indexed universal life insurance
- Alternatives to universal life
- Bottom line
- Frequently asked questions
- Compare multiple providers
- Calculate how much coverage you need
- Get a quote in 2 minutes
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What is universal life insurance?
Universal life insurance is a permanent policy with a savings component. Along with offering lifelong coverage, it builds cash value over time and gives you the freedom to adjust your premium and death benefit.
How does universal life insurance work?
Each time you pay your premium, a portion goes into an account that builds cash value at a fixed interest rate set by the insurer. Once you’ve accumulated enough cash value, you can begin to take out tax-free loans against your policy. Eventually, you can also use the cash value to cover your premiums.
With universal life insurance, you can adjust your premium and death benefit to suit your needs and financial situation.
When you die, your beneficiaries will receive a guaranteed death benefit equal to the face value of your policy. You can choose multiple beneficiaries, and decide how you’d like the money to be allocated between each.
Pros and cons of universal life insurance
- Lifelong coverage. Your policy stays in force for your entire life, as long as you pay your premiums.
- Cash value growth. A portion of your premium goes into a savings-type account and earns interest over time.
- Flexible premiums. This policy allows you to change your premium and coverage amount — making it ideal for those who foresee income fluctuations or major life changes.
- Tax advantages. You can take out tax-free loans against your policy, and the death benefit paid out to your beneficiaries isn’t taxable.
- Expensive. Universal life insurance can be six to ten times more expensive than a term life policy.
- Limit on returns. Your insurer will cap your cash value returns, so ask about the “participation rate” before signing up.
- Requires monitoring. You’ll need to make sure your cash value doesn’t dip too low, or you could lose your coverage.
- Not always the best investment. Interest rates tend to be conservative. If building a cash asset is your main priority, you might find better rates with other investment vehicles.
Is universal life insurance right for me?
Universal life insurance has its perks, like flexible premiums and the ability to use your policy’s cash value to cover premiums later in life. But thanks to its investment component, it requires a higher risk tolerance and a more hands-on approach than term or whole life insurance.
Since it’s a complicated product, it’s best suited to those with complex financial needs. This may include parents with special needs children, or wealthy individuals who want to treat their life insurance policy as an estate planning tool.
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Traditional universal life insurance vs. indexed universal life insurance
Indexed universal life insurance (IUL) differs from traditional universal life insurance (UL) in one significant way: IUL allows you to tie your policy’s cash value to a market index, like the S&P 500 or the Nasdaq 100.
The market index you attach your policy’s cash value to is often capped, which limits how much you can earn with IUL. If the S&P index is capped at 4%, it means your IUL cash value can earn up to 4% of what the S&P index earns only.
|Traditional life insurance (UL)||Indexed universal life insurance (IUL)|
|Builds cash value||Yes||Yes|
|Policy options — death benefit and premiums||Flexible||Flexible|
|Cash value rates||Fixed by provider||Tied to market index|
|Potential for investment growth||Conservative, stable||Assertive, fluctuating|
What about variable universal life insurance?
This policy is a hybrid product with elements of variable and universal life insurance. With variable universal life insurance, you can invest your cash value in the investments of your choice, and adjust your premium payments as you wish.
While this product offers the highest potential for return, it also comes with a higher degree of risk — making it best for high-income earners with prior investment experience.
Alternatives to universal life
If you’re interested in a permanent policy, consider whole life insurance. It offers similar benefits, like lifelong protection and the potential to build cash value. The cash value grows at a fixed rate, and the premiums stay the same for the life of the policy.
If you only need life insurance for a set period of time, look into term life insurance. This policy is cheaper, and provides protection for a specified term — like 10, 15, 20, 25 or 30 years. While it doesn’t have an investment component, it offers predictable premiums. If you die during the term, your beneficiaries will receive a death benefit. And if you outlive your policy, your coverage will expire.
Universal life insurance is a permanent policy that allows you to adjust your premiums and coverage amount and accumulate cash value. But it’s expensive, and you’ll need to stay on top of your policy’s available cash value to avoid losing your coverage.
To find the policy that fits your family’s needs, compare life insurance providers.
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