- Life Insurance

Universal Life Insurance

Universal life is a form of permanent life insurance which combines a term life policy with a savings or cash value component. It differs from a traditional whole life policy by having more flexibility in the size and frequency of premium payments, more adjustability of death benefit and the potential for greater growth of cash value. Unlike whole life, with a universal life policy you can change the amount of insurance coverage you have within your policy as your life insurance needs change.

In both universal life and whole life insurance the death benefit is tax-free for your beneficiaries and the cash value is tax-deferred. Both whole life and universal life use part of the premium to pay the cost of insurance and put the rest into a cash value fund, with a guaranteed interest rate of usually at least 4%. However, unlike the fixed, level premium payment of a whole life policy, in a universal life policy you can adjust your premium payments. This affects the amount of death benefit, which you can decrease by lowering your premium payments or, as long as you are in good health and considered insurable, you can increase by contributing a lump sum or larger premium payments. You can also choose to have a level death benefit, resulting in lower premiums as your cash value increases. This flexibility of universal life policies is also a potential pitfall as if you do not pay sufficient premiums in the earlier years you may find the premiums increase dramatically in the later years. In a whole life policy the death benefit is fixed, and is guaranteed to be paid out on the death of the policyholder as long as the premiums are fully paid. But in universal life the policy can lapse if the cash value or premium payments are not high enough to cover the cost of insurance. Some policies guarantee that if you make a given amount of premium payments, the policy will stay active even if the cash value is exhausted.

Some variations of universal life insurance are: variable universal life and equity indexed universal life. By investing the cash value in stocks, bonds and mutual funds, variable universal policies offer the potential for greater growth than standard universal life, but also the risk of cash value loss in a market downturn. Some variable universal policies have a cap for maximum growth and a minimum guarantee to protect you from the extremes of the market. Equity indexed universal life policies track the rise and fall of certain market indexes, such as the Dow or the S&P 500, and credit or debit your cash value fund accordingly.

If you prefer the certainty of knowing what your premiums will be and you are confident that you will be able to pay them for the duration of your policy, then whole life may be the best choice for you. But if you value the flexibility to adjust your premium payments and death benefit according to your needs then universal may be a good choice of permanent life insurance.