Universal Life Insurance: A Historical Overview

Universal life insurance is a type of permanent life insurance that offers flexible premium payments, death benefits, and savings. Unlike whole life insurance, which has fixed premiums and guaranteed cash value accumulation, universal life insurance allows policyholders to adjust their premiums and death benefits within certain limits. This flexibility, however, comes with the risk of the policy becoming underfunded and lapsing if premiums are not sufficient to cover the cost of insurance. Universal life insurance also offers the potential for cash value growth, with interest rates set by the insurer, but these rates can change frequently. While universal life insurance provides lifelong coverage, it requires a more hands-on approach than other permanent policies due to its complex nature.

Universal life insurance is a type of permanent life insurance

Universal life insurance is also known as adjustable life insurance because of the flexibility it offers. You have the ability to reduce or increase your death benefit and adjust your premiums (subject to certain limits) once there is money in the account.

Universal life insurance policies work similarly to other permanent policies. In exchange for premiums, you typically get lifelong coverage, and your beneficiaries receive a payout when you die. You also have the opportunity to build cash value and take out loans while you're still alive.

However, universal life insurance has unique features that set it apart from other types of policies.

Universal Life Insurance Cash Value

When you make a premium payment, the insurance company takes out the cost of the insurance as well as any administrative fees. The rest is added to your policy's cash value, which can grow over time based on an interest rate set by the insurance company. Universal life policies come with a guaranteed minimum interest rate.

Universal Life Insurance Premiums

The main perk of universal life insurance is the ability to adjust your premiums. You can pay more than the minimum premium, up to a certain limit, and the additional funds—minus any administrative charges—are funnelled into your cash value.

Alternatively, you can pay less than the minimum premium. If you do this, make sure you have sufficient cash value to cover the cost of insurance and other expense charges, or your coverage may lapse.

Universal Life Insurance Death Benefit

You usually have the option to decrease your life insurance death benefit, which can be handy if you no longer need as much coverage. Some insurers may allow you to increase your coverage, though this option is less common.

In general, there are two types of death benefits to choose from:

• Level death benefit: In most cases, the death benefit amount remains the same through the life of the policy. For example, if you buy $100,000 of coverage and build up $60,000 of cash value, your beneficiaries receive $100,000 when you die.
• Increasing death benefit: Your cash value balance is added to the death benefit. So, in the previous example, your beneficiaries would get $160,000: the death benefit plus the cash value. This option comes with higher premiums.

It offers flexible premium payments

Universal life insurance is a type of permanent life insurance that offers flexible premium payments. Unlike whole life insurance, which has fixed premiums, universal life insurance allows the policyholder to raise or lower their premiums within certain limits. This flexibility means that universal life insurance can be cheaper than whole life coverage. However, if you underpay for too long, it could cause your policy to lapse.

The premium for universal life insurance consists of two components: the cost of insurance (COI) and a saving component, known as the cash value. The COI is the minimum amount required to keep the policy active and includes the charges for mortality, policy administration, and other associated expenses. Any premiums paid over the COI are added to the policy's cash value and accumulate interest. This interest rate is set by the insurer and can change frequently, although there is usually a minimum rate that the policy can earn.

The flexibility of universal life insurance means that policyholders can adjust their payments as their circumstances change. For example, if your earnings vary, you can lower your premiums to ensure you can continue to afford the policy. However, paying less than the minimum premium could put your coverage at risk. Therefore, it is important to monitor your cash value to ensure that it is sufficient to cover the COI and other expense charges. If your cash value falls to zero, your policy may lapse.

Universal life insurance also offers the option to increase or decrease the death benefit. Increasing the death benefit may require a medical exam, while decreasing it can help to reduce your premiums.

It has a savings element

Universal life insurance is a type of permanent life insurance that offers a savings element. This means that, in addition to providing lifelong coverage, it allows you to build cash value over time. The savings element of universal life insurance is what sets it apart from other types of life insurance, such as term life insurance, which does not accumulate cash value.

Here's how the savings element of universal life insurance works: when you make a premium payment, the insurance company takes out the cost of insurance and any administrative fees. The rest of the payment is added to your policy's cash value, which can grow over time based on an interest rate set by the insurance company. This interest rate is usually variable, but there is typically a guaranteed minimum interest rate.

The cash value in your universal life insurance policy can be accessed in a few different ways. You can take out a loan against the cash value, with the insurance policy acting as collateral. You can also make withdrawals from the cash value, but this will reduce the death benefit of the policy. Additionally, if you surrender the policy, you will receive the cash value minus any surrender charges.

The savings element of universal life insurance offers several benefits. It provides you with flexible premium payment options, as you can pay more or less than the minimum premium, depending on your financial situation. It also offers the potential for cash value growth, especially if the insurance company sets a favourable interest rate. However, there are also risks associated with the savings element. If you don't carefully monitor your cash value, your policy may become underfunded, leading to large premium payments or even policy lapse. Additionally, if the interest rate drops, your cash value may not grow as expected.

Overall, the savings element of universal life insurance adds a layer of complexity to the policy, but it also provides flexibility and the potential for growth. It's important to carefully consider the pros and cons of this feature before deciding if universal life insurance is the right choice for you.

It has a death benefit

Universal life insurance is a type of permanent life insurance that offers flexible premium payments, death benefits, and savings elements. It is similar to whole life insurance but differs in the degree of flexibility it offers. While whole life insurance offers fixed premiums and guaranteed cash value accumulation and death benefits, universal life insurance allows the policyholder to adjust their premiums and death benefits within certain limits. This flexibility, however, comes with the risk of the policy becoming underfunded and lapsing if the cash value is insufficient to cover the insurance and administrative expenses.

Universal life insurance policies typically offer two types of death benefits: a level death benefit, where the death benefit amount remains the same throughout the policy, and an increasing death benefit, where the cash value balance is added to the death benefit. The latter option comes with higher premiums.

The death benefit of a universal life insurance policy can be increased or decreased, subject to certain conditions. To increase the death benefit, the policyholder may need to undergo a medical exam to qualify for the additional coverage. On the other hand, decreasing the death benefit may be possible after the policy has been in force for a few years.

The flexibility of universal life insurance policies makes them a good choice for individuals who want the ability to adjust their premium payments and death benefits over time. However, it is important to carefully consider the risks and complexities associated with these policies, as they require active monitoring to ensure the policy remains in force.

It is similar to whole life insurance

Universal life insurance is similar in some ways to whole life insurance. Both are types of permanent life insurance, which means they offer coverage for the policyholder's lifetime. However, universal life insurance provides more flexibility than whole life insurance.

Universal life insurance allows policyholders to adjust their premiums and death benefits within certain limits. This flexibility can be useful for those with fluctuating incomes. In contrast, whole life insurance offers fixed and consistent premiums, which means policyholders pay the same amount throughout the life of the policy. Whole life insurance also guarantees cash value accumulation, while universal life insurance does not.

Another difference between the two types of insurance is that the administrative expenses and cost of insurance within a universal life contract are transparent to the policyholder, whereas the assumptions the insurance company uses to determine the premium for a whole life insurance policy are not. This transparency allows policyholders to understand the inner workings of their universal life insurance policy and make more informed decisions.

In terms of cost, universal life insurance is generally cheaper than whole life insurance because it does not offer the same guarantees. Whole life insurance tends to be more expensive due to its fixed premiums, guaranteed cash value accumulation, and guaranteed death benefit.

While both universal and whole life insurance have their advantages, universal life insurance may be more suitable for those seeking flexibility in their premiums and death benefits. On the other hand, those who prioritize consistency and guarantees may prefer whole life insurance.

Frequently asked questions