Universal Life Insurance

Universal life insurance is also called adjustable life insurance because of the flexibility it offers. You have the liberty to reduce or increase your death benefit and pay your premiums at any time in any amount (subject to certain limits) once there is money in the account.⁴

How Universal Life Insurance Works

When you make a payment to your universal life insurance plan, part of it goes into an investment account, and any interest accrued is credited to your account. The interest you earn grows on a tax-deferred basis, increasing your cash value.

You can adjust the death benefit when needed, increasing it (often subject to a medical exam) if your circumstances change, or lowering it to reduce premiums. Alternatively, you can use your cash value to pay premiums as long as there is enough money in that account.

Pros and Cons of Universal Life Insurance

The ability to adjust the face value of your coverage without surrendering your policy is an attractive feature of universal life coverage. As your financial circumstances or responsibilities change, you can increase, decrease—or even stop—premium payments

WHAT ARE THE BENEFITS OF UNIVERSAL LIFE INSURANCE?

Beyond lifelong protection, there are a few additional features of universal life insurance:

You can withdraw money or borrow against the policy's cash value.
Your cash value earns interest.
You have flexibility with premiums.
You can adjust the death benefit.

Withdraw Money or Borrow Against It

When you pay your premium on a universal life insurance policy, a portion of each payment goes toward paying for the death benefit. Another portion also goes to building up the policy's cash value. Over time, after the money has accumulated, you may be able to withdraw or borrow against the cash value of the policy (the available amount will vary by company). The rules on how and when you can do this vary by insurance company and policy. However, it's important to know that this may reduce your death benefit, create a tax implication or even cause your policy to lapse.

Earn Interest on Your Policy's Cash Value

The cash value of a universal life policy generally earns interest that's in line with current money market rates, says the Insurance Information Institute (III). Of course, it's important to note that the interest rate will fluctuate along with the market, which means the interest you receive may also go down. But, some companies offer protection against that with a minimum performance guarantee on the policy.

Flexibility With Premiums

If the cash value of your account can cover the costs, you may have the ability to lower or stop paying your premiums on a universal life policy for a certain amount of time, the III says.

This can be helpful if money becomes tight and you're looking for ways to lower monthly bills. But, there can be negative consequences, too, says the III. For instance, your coverage may end if you use up the account's cash value to pay for premiums.

Keep in mind that you must continue paying premiums to keep your policy in force. If you don't pay your premiums, your policy will lapse (meaning you no longer have coverage). If you can't pay a premium on time, your insurer may offer a grace period — a specified amount of time in which you have to make up a missed payment before coverage lapses. Read your policy or check with your agent for more information.

Adjust the Policy's Death Benefit

The flexibility of a universal life policy also extends to the death benefit. At some point, you may want to increase the amount that's paid out upon your death. This is something some insurance companies allow, as long as you pass a medical exam, says the III2,3. Likewise, you might choose to reduce the death benefit, to reduce the cost of the policy. Remember that if you increase the policy's death benefit, it may increase the premium you pay.

WHAT IS THE DIFFERENCE BETWEEN UNIVERSAL LIFE INSURANCE AND WHOLE LIFE INSURANCE?

With a universal life insurance policy, you may be able to adjust your premiums and death benefit over time to suit your needs. With a whole life insurance policy, the premiums and death benefit are fixed for the duration of the policy.

WHO MIGHT CHOOSE UNIVERSAL LIFE INSURANCE?

The III offers some guidelines on how to decide whether permanent life insurance like universal life is right for you:

If you're looking for coverage that lasts your entire life.

If you keep up with your policy's premiums, universal life pays a death benefit to your beneficiaries no matter when you pass away.

You have long-term savings goals.

If you want to build tax-deferred savings and don't expect to tap into the funds for a long time, universal life may be a suitable option for you, the III says. The cash value option that's part of a universal life policy may be available for you to withdraw or borrow against in an emergency.

It's a good idea to talk with a local insurance agent to better understand your life insurance options. They can help you review your personal situation and long-term goals to help you choose a policy that's a good choice for you and your family.