What Is Universal Life Insurance (ULI) and How Does It Work?
Life insurance is an important instrument for protecting your loved ones if you pass away unexpectedly. There are various types of life insurance, including term, whole, and universal, and knowing their differences is critical to selecting which is the best fit for you.
We’ll examine how universal life insurance (ULI) works, its benefits and drawbacks, and how it compares to other types of life insurance in this post.
What Is Universal Life Insurance (ULI)?
Universal Life Insurance (ULI) is a type of permanent life insurance. It covers the policyholder for the rest of their lives or until they reach a specific age — usually between 90 and 120 years old — as long as they pay their monthly premiums on time.
After the policyholder dies, the insurer pays the policy’s beneficiaries a death benefit. Some universal life insurance (ULI) accumulates cash value that policyholders can borrow on, withdraw from, or utilize to offset growing premium expenses as they get older.
How Universal Life Insurance (ULI) Works
When a person buys universal life insurance (ULI), they’re signing a contract with the insurance company. They agree to pay premiums on a monthly basis. In exchange, the insurer is contracted to pay the policyholder’s beneficiaries a death benefit if the policyholder dies.
Universal life insurance (ULI) rates are often variable, and they typically climb as the policyholder ages, unlike whole life insurance, which has fixed premiums. They can, however, be more flexible than whole-life insurance premiums.
Riders are available from the best life insurance companies, allowing policyholders to customize their policies. The specific riders available will differ from one insurance provider to the next.
The universal life coverage is only valid as long as the policyholder keeps paying the premiums. They risk losing their coverage if they miss even one payment.
Types Of Universal Life Insurance
Indexed universal life, variable universal life, and guaranteed universal life insurance are the three primary types of universal life insurance.
Indexed Universal Life Insurance
In addition to offering a death benefit, indexed universal life (IUL) insurance allows policyholders to invest a portion of their cash value in an equity index account.
This implies that any money left over after the policy’s fees are cleared is invested in a savings account. The performance of a market index, such as the S&P 500 determines the interest rate. The funds are not, however, directly invested in stocks.
The index life insurance policies are less hazardous than variable universal life insurance, but the amount of interest a policyholder can receive is frequently limited. Furthermore, if the index experiences a loss, the policy may not receive any money for the year.
Variable Universal Life Insurance
Variable universal life insurance is comparable to indexed universal life insurance in that its features for investment subaccounts allow policyholders to put their cash value in actual securities. If somehow the policyholder invests correctly, this could result in considerable returns. However, if their investments do not perform well, they risk losing a lot of money. They may lose all of the cash value they have accumulated in some circumstances.
Variable universal life insurance is more complicated than other types of life insurance, and it also tends to be more expensive.
Guaranteed Universal Life Insurance
Guaranteed universal life (GUL) insurance is the most basic and affordable type of universal life insurance. This type of policy usually has no cash value attached to it. It offers set premiums, however, unlike indexed or variable universal life insurance, policyholders usually don’t have the ability to change their premium payment or death benefit amount.
In addition to universal life insurance, most life insurance companies offer term and whole life insurance plans.
Whole Life Vs. Universal Life Insurance
Whole life insurance is another category of permanent life insurance. It is more expensive than universal life insurance, but it offers more protection. These policies come with the promise that rates will not rise in the future. They also include guaranteed death benefits, as well as a minimum guaranteed rate of return on the policy’s cash value. Dividends are paid on some whole life insurance contracts, although they aren’t guaranteed.
Whole life insurance policies may be a good fit for someone looking for lifelong coverage and is ready to pay higher for the added guarantees.
Term Life Insurance Vs. Universal Life Insurance
Term life insurance provides coverage for a specific number of years. The insurer pays the benefit from the coverage to the policyholder’s beneficiaries if the policyholder dies during the term. The insurance company keeps all of the money if the insured is still alive at the end of the term.
Permanent life insurance is more expensive than these policies. They’re a popular option for parents of young children who want to ensure that their families can keep paying their bills after they pass away.
The Advantages And Disadvantages Of Universal Life Insurance
The following are some of the benefits and drawbacks of universal life insurance.
Pros
- Coverage for the rest of your life.
- It offers premiums that are adaptable.
- It can build up a cash value that the policyholder can borrow against or withdraw to pay premiums.
Cons
- A single missing payment can make you lose your coverage.
- It’s more difficult to understand than term life insurance.
Cash Value Of Universal Life Insurance
You must make payments that cover the cost of the insurance in order to keep a universal life insurance policy. However, policyholders might pay more than the minimal cost of insurance with indexed or variable universal life insurance. The excess is added to the policy’s cash value and can generate interest.
This monetary value can be used in a variety of ways by policyholders. One possibility is to pay for future premiums. If the policyholder’s cash value is high enough, they may be able to skip a payment or even stop making payments entirely.
They can also take the money and use it for their own needs. However, doing so will result in them paying taxes and reducing the death benefit due to their heirs. Another alternative is to borrow against the cash value of the life insurance policy. If the policyholder does this, they will not be subject to taxes, but they will have to repay the money they borrowed plus interest. If they fail to repay the loan, the insurer deducts the outstanding debt from the policyholder’s death benefit.
Who Is A Good Candidate For Universal Life Insurance?
Universal life insurance is a wonderful option for those searching for coverage that would cover them for the rest of their lives. It’s also a good choice for those interested in the investing prospects offered by universal life insurance policies.
Compare whole vs. term life insurance to see if one of these is a better fit for you if you think universal life insurance isn’t suited for you.
Frequently Asked Questions About Universal Life Insurance
Is Universal Life Insurance A Sound Financial Decision?
For those searching for a life insurance policy that covers them for the rest of their lives, universal life insurance could be a good purchase. However, like with anything, it’s critical to read the policy terms to ensure you know what you’re getting.
Should I Keep My Universal Life Insurance Policy?
It’s up to you to decide whether or not to keep a universal life insurance policy if you already have one. Examine the conditions of your insurance and determine what options you have if you no longer want to keep it.
Does A Universal Life Insurance Policy Have An Expiration Date?
Some policies only cover up to a specific age. It can be 100 or 120, at which point the contract will expire. Also if the insured fails to pay the premiums, the policy’s cash value will be exhausted, and the policy will expire. Because the insurer is no longer receiving payments, it will cease to offer coverage.
What Happens When a Universal Life Insurance Policy Reaches Its Expiration Date?
When a universal life insurance policy reaches maturity, either when the policyholder dies or reaches a specific age, the company will pay the death benefit amount to the policyholder or their beneficiaries, less any outstanding loans.
Is Universal Life Insurance Exempt From Paying Taxes?
The death benefit given to a universal life insurance policy’s beneficiaries is tax-free. However, if the policyholder withdraws any of the policy’s cash value while still alive, they may owe taxes.
