Universal Life (UL) Insurance

Understanding Universal Life Insurance: Benefits, Drawbacks, and How It Works

Universal life (UL) insurance offers a blend of permanent coverage and investment potential, with flexible premiums and cash value accumulation. Learn how UL insurance works, its advantages, drawbacks, and considerations before purchasing.

Key Takeaways:

• UL insurance combines permanent coverage with an investment savings element and low premiums.
• Policyholders pay a minimum premium to keep the policy active, with excess premiums accumulating as cash value.
• Cash value can be accessed by policyholders, but withdrawals are subject to taxation.
• UL policies offer flexibility in premiums and death benefits, but holders need to monitor rising costs and potential lapses.

How Universal Life (UL) Insurance Works

Universal life insurance provides more flexibility than whole life insurance, allowing policyholders to adjust premiums and death benefits. Premiums consist of a cost of insurance (COI) amount and a cash value component. The COI is the minimum premium required to keep the policy active, covering mortality charges and administrative expenses. Excess premiums accumulate within the cash value portion of the policy, which policyholders can access or borrow against.

Advantages and Disadvantages of Universal Life (UL) Insurance

Cash Value: UL policies accumulate cash value over time, which earns interest and can be accessed by policyholders without affecting the death benefit. However, withdrawals are subject to taxation, and unpaid loans can reduce the death benefit.

Flexible Premiums: Unlike whole life policies, UL insurance allows for flexible premiums, with excess payments adding to the cash value. Policyholders can skip payments if there's enough cash value, but they must monitor rising costs as they age to avoid policy lapses.

Why Consider Buying Universal Life?

UL insurance offers the potential for cash value accumulation and flexibility in premiums and death benefits. Policyholders can adjust their coverage and receive interest on excess premium payments.

Do UL Policies Have Downsides?

Policyholders need to be aware of fees, taxation on withdrawals, and interest charges on loans. Rising premiums as they age can also pose challenges, potentially requiring higher payments to maintain coverage.