There are many different scenarios that could require life insurance protection. These include coverage for spouse and other dependents, the assurance that a business will transfer successfully if the owner should suddenly die, or the providing of a donation to a favorite charity.
In some cases, term life insurance will fit the bill, while in other cases, an individual may do better with permanent coverage. When it comes to permanent life insurance, there are a number of different policy types to choose from. The most common of these are whole life, variable life, and universal life insurance.
What is Universal Life Insurance?
Universal life insurance, or UL, has been described as offering the low-cost death benefit of term life insurance with a cash value component like whole life insurance. With these types of policies, there is a great deal of flexibility afforded to the policyholder.
Just like with other forms of permanent life insurance, universal life offers both death benefit protection and cash value, or savings, build up. The money that is in the cash value is allowed to grow on a tax-deferred basis, meaning that there is no tax due on the growth unless or until the funds are withdrawn.
These funds may be either borrowed or withdrawn for any need that the policyholder sees fit, such as the payoff of debt, the supplementing of retirement income, or even for a nice, long-awaited vacation.
Universal life insurance policies are also considered to be interest rate sensitive. This means that these policies’ cash value is used to purchase short-term interest-bearing instruments. With most universal life insurance plans, there will be a minimum guaranteed amount of interest rate that is stated for the cash value component. Whenever current market interest rates are higher than this stated rate, however, the issuing insurance company will usually pay a higher amount than the guarantee.
Depending upon how the interest rate in the cash value component is credited, the rate of return on these funds can be higher than on a comparable whole life insurance policy. In addition, the cash in a universal life policy is also typically easier to access by the policyholder.
This is because the policyholder can even stop making premium payments and still keep the policy in force – provided that there are enough funds left in the cash account to do so.
How Universal Life Insurance Works
While universal life insurance may at first appear to be very similar in nature to whole life, the reality is that there are some distinct differences. For example, those who have a universal life insurance policy are allowed much more flexibility regarding the timing of their premium payments. They may also be able to choose, within certain guidelines, the amount of the premium that they put towards the policy’s death benefit and the amount that they put into the cash value.
Here, each time that a premium payment is made, the insurance company will deduct a certain amount to cover the cost of the insurance while at the same time crediting another portion of the payment to the policy’s cash value account.
In addition, a universal life insurance policyholder may even be able to move money between the two sections, or components, of the policy – and because the premiums are variable, the policyholder may even decide to adjust the proportions based upon external market conditions.
As an example, if the cash value portion of the policy is not earning a good return during a particular period, then the policyholder may use more of their cash to pay policy premiums – or death benefit coverage – rather than putting those funds into the cash account.
Term versus Permanent Life Insurance Policies
Universal life insurance is a type of permanent life insurance protection. With permanent coverage, there is both death benefit protection, as well as a cash value component of the policy.
Term life insurance, however, only offers death benefit coverage, with no cash value or savings build up. While term life insurance may be considered more of a “plain vanilla” policy, the premium that is charged for term life is often less than that of a comparable permanent plan.
Types of Universal Life Insurance Available
As with other categories of life insurance, there are different types of coverage within the universal life insurance family. These include the following:
- Interest Sensitive Universal Life – Interest sensitive universal life insurance is another name for the traditional form of universal life insurance.
- Variable Universal Life – Variable universal life insurance is similar to traditional universal life, except that the policyholder is allowed to invest the cash portion of their policy into different types of equity investments such as mutual funds. There is no guaranteed minimum cash value in a variable universal life insurance policy.
- Indexed Universal Life – Indexed universal life insurance, or IUL, policies have the performance of their cash value linked to a particular market index, such as the S&P 500. Therefore, the account value of these policies will tend to rise based on the positive movements in the index that is being tracked. Most equity indexed universal life insurance policies, however, will provide a guarantee that the value of the cash account will not fall below zero of the index encounters a dramatic fall.
In this case, should the underlying index have a negative return during a given year, then the cash value is simply credited with 0%. Conversely, these types of policies also typically have a cap on the amount of positive growth that can occur as well. This means that even if the corresponding index performs very well, the value of the cash account will not rise above a set cap.
How Much Does Universal Life Insurance Coverage Cost
The premium that is charged for universal life insurance can vary, based on many different factors. These include the type of policy being purchased, as well as the amount of death benefit protection. In this case, the higher the amount of coverage, the more the premium will typically be.
The cost of one’s universal life insurance policy premium will also be based on the age and the health of the applicant / insured. Because the price of life insurance policies are based in large part on anticipated life expectancy, the younger a person is when he or she applies, the less the premium amount is likely to be.
Similarly, one’s health condition at the time of application can also make a difference is how much will be charged. In this case, if a person health an adverse health issue, they may be required to pay higher premiums – or, depending on the condition, they may not be approved for the coverage at all.
Likewise, whether or not a person is a smoker will also play a key role in the amount of premium that is charged. Concerning a life insurance premium, an individual who is categorized as a smoker may pay upwards of two, or even three, times the premium of a person who does not smoke (all other factors being equal).
Should You Consider Universal Life Coverage?
Because all situations are not the same, whether or not a universal life insurance policy is right for you will depend upon your specific needs and goals. For example, if you have more permanent life insurance coverage requirements, then a universal life insurance policy could be a viable alternative.
Likewise, if you anticipate that you may have health issues in the future, then locking into a permanent life insurance policy could also be a wise financial move, as this type of coverage will remain in force for your lifetime (provided that the premiums are paid).
How to Get the Best Premium Rates on Universal Life Insurance Protection
When shopping for universal life insurance, getting the best premium rates is an important factor in your overall buying decision. In order to ensure that you’re getting a competitive rate on this type of insurance protection, it can be beneficial to work with an independent life insurance brokerage that can show you many different policies, carriers, and premium quotes. That way, you can determine which will work the best for you, and for your budget.
When you are ready to purchase universal life insurance, we can help. We work with many of the top life insurance carriers in the market today, and we can make your shopping experience easy and convenient. If you want to begin the process, then just simply take a second to fill in the information needed in the quote form on this page.