Universal Life Insurance: Who Qualifies And How To Apply

Universal life insurance is a type of permanent life insurance that offers flexible premium payments and death benefits. It also has a cash value component that grows over time and can be accessed by the policyholder during their lifetime. While universal life insurance offers more flexibility than other types of permanent life insurance, it also requires more active management and monitoring of the policy. The main perk of universal life insurance is the ability to adjust your premiums, which may appeal to those with fluctuating incomes. However, it's important to note that underpaying for too long can impact cash value growth and the size of your death benefit.

Universal life insurance vs. whole life insurance

Universal life insurance and whole life insurance are both permanent life insurance policies that offer lifelong coverage and a death benefit. However, they have several differences, and understanding these can help you decide which plan is right for you.

Whole Life Insurance

Whole life insurance is the most common type of permanent life insurance. It offers a guaranteed death benefit that will never decrease as long as premiums are paid. It also has fixed and guaranteed premiums that will never rise. Whole life insurance also offers a guaranteed cash value build-up over the life of the policy, which can be used to save for the future or to borrow against to pay for unexpected expenses. Whole life insurance is a good option for those who want permanent, stable protection and don't mind paying higher premiums for the convenience of guaranteed premiums, death benefits, and cash value growth.

Universal Life Insurance

Universal life insurance offers more flexibility than whole life insurance. It allows you to adjust your premiums and death benefit to suit your needs and income fluctuations. You can increase or decrease your premium or even skip payments if your cash value amount can cover the payment. The cash value of a universal life policy can also increase your death benefit. However, universal life insurance requires more oversight and doesn't have a guaranteed death benefit. It may also be more expensive in the long run as the cost of keeping the policy can go up significantly as you get older. Universal life insurance is a good option for those who want to be able to adapt their policy and have more control over their coverage and payments.

Both universal and whole life insurance can offer lifelong coverage, but they have distinct differences. Whole life insurance provides more stability and guaranteed benefits, while universal life insurance offers more flexibility and control. The best option for you will depend on your unique circumstances and preferences.

Pros and cons of universal life insurance

Universal life insurance is a type of permanent life insurance that offers flexible premium payments and lifelong coverage. It is a complex product with several pros and cons that potential buyers should consider.

Pros of Universal Life Insurance

• Flexible premium payments: You can adjust the size and frequency of your payments, which is handy if your income fluctuates.
• Flexible death benefit: You may be able to increase or decrease the death benefit.
• Lifetime coverage: Universal life insurance policies last your entire life, subject to the policy's maturity date, which is often 85 to 121 years.
• Cash value component: The policy includes a cash value account that grows over time and can be used for retirement, emergencies, or paying premiums.
• Potential tax benefits: The death benefit is typically tax-free for beneficiaries, and you only pay taxes on the cash value if the policy lapses.

Cons of Universal Life Insurance

• Complex and risky: Universal life insurance policies are complicated and may carry more risk than other types of life insurance. Returns are not guaranteed and depend on investment performance.
• Requires monitoring: You need to monitor the cash value account to ensure the policy remains funded and doesn't lapse.
• Variable premiums: Unlike term and whole life insurance, premiums are not fixed and may increase over time due to inflation or poor market performance.

Types of universal life insurance

Universal life insurance is a type of permanent life insurance that offers flexible premium payments and lifelong coverage. It also has a cash value component that grows over time and can be used to supplement your income in retirement. Here are four types of universal life insurance:

• Guaranteed Universal Life Insurance (GUL): This type offers a death benefit and premium payments that remain unchanged over time. It often has little cash value and is the cheapest type of universal life insurance. GUL policies are designed not to lapse, but they may terminate if you miss a payment or pay late.
• Indexed Universal Life Insurance (IUL): IUL ties the cash value to the performance of a stock market index, such as the S&P 500. It offers flexibility with the death benefit and premiums. However, there are participation rates and caps that can limit your cash value gains.
• Variable Universal Life Insurance (VUL): VUL allows you to choose sub-accounts for your cash value investments, giving you control over your investments. It offers the potential for higher returns but also carries a higher risk of losing cash value.
• Fixed Universal Life Insurance: This type provides flexible premium payments and stable cash value growth tied to a fixed interest rate.

Universal life insurance riders

• No-lapse guarantee: This rider ensures that as long as you pay the annual amount required to maintain the guarantee, your death benefit will remain in place even if your cash value drops.
• Waiver of cost of insurance: This rider pauses premium payments if you become disabled, keeping your policy in force. However, no funds are added to the cash value.
• Accelerated death benefit: This rider allows you to access some or all of your death benefit while you're still alive if you're diagnosed with a terminal, critical, or chronic illness. The terms of this rider vary by insurer, so it's important to check what illnesses are covered and how much it pays out.
• Family riders: Child and spouse riders allow you to add coverage for family members under your universal life policy. These riders typically pay out a small death benefit to cover medical bills and funeral expenses.
• Accidental death: This rider increases the payout from your policy if you die in, or as a result of, an accident.
• Guaranteed insurability: This rider allows you to increase the death benefit of your policy at specific life stages or policy anniversaries without an exam or health questionnaire.

While these riders can provide valuable benefits, it's important to note that adding them may increase your premium. It's essential to carefully review the fine print and consider the potential impact on your premium before deciding to add any riders to your universal life insurance policy.

How to find the best universal life insurance company

Universal life insurance is a complex product, so to find the right company, focus on these three things:

Financial strength

You'll want to choose a life insurance provider with strong financial strength ratings so you know your cash value is safe and that your beneficiaries will receive a payout when you die. AM Best and S&P Global Ratings are good sources to check for these ratings.

Policy types

You should find a company that offers the policy options you’re looking for. Universal life policies can be sold with different guaranteed level premiums and various fee structures. The riders below may not be available from each company:

• No lapse guarantee
• Waiver of cost of insurance
• Accelerated death benefit
• Family riders
• Accidental death
• Guaranteed insurability

Expert advice

Finally, it’s a good idea to consult a fee-only life insurance consultant. They can help you to better understand how the company’s products differ.

Frequently asked questions