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Universal Life Insurance

Life insurance can help solve for many financial needs. But you may be unsure as to what kind of life insurance might be right for you. When shopping around for options, universal life insurance is one of many insurance choices to think over.

Universal life insurance is a form of permanent life insurance. In the insurance industry, it is often referred to simply as “UL” or “UL insurance.” In exchange for paid premiums, the insurance company assures a death benefit to be paid out should the policyholder die. Like other permanent insurance options, universal life insurance comes with a cash value component. The cash value has the potential to grow over time.

Generally speaking, universal life insurance comes with flexible premiums. You may be able to adjust how much you will pay in premium costs each year. However, minimum premium amounts must be covered or the universal life policy will lapse. But so long as the policy stays in force, it will provide lifelong coverage, just as with whole life insurance. 

Let’s get more into the basics of universal life insurance, its potential benefits, and its possible uses in a financial plan.

What is Universal Life Insurance? 

Universal life insurance was created as an alternative to whole life insurance. This was for the goal of giving consumers more flexibility than whole life policies do. Universal life insurance comes with two components: an insurance part and a wealth-building part.

When premiums are paid, part of them goes toward the insurance part of the policy, covering costs associated with having insurance. This part includes a preset amount to be paid out as the death benefit. Other portions of the premium payments go into the wealth-building part, which is the cash value.  The cost of insurance must be covered so the policy stays effective, but you may be able to adjust premiums, over time, as your needs change. 

Under IRS tax law, the UL policy's cash value grows tax-deferred. Upon the cash value growing to a suitable level, you may take withdrawals from it or borrow against it.

Because of these two components, universal life insurance tends to have higher premium costs than term life insurance does. 

Understanding Universal Life Insuranceuniversal life insurance img 2

Like with whole life insurance, universal life insurance can appeal to people who may use the cash value for different goals. Many policyholders use UL policies for financial liquidity, supplemental income, legacy transfers, business successions, and other purposes. 

The policyholder can borrow against the cash surrender value, and they aren't required to pay the loan back. However, should the policyholder pass away, any outstanding loan balances will be taken from the death benefit.

Now, let's talk about how the cash value may grow:

  • Within a universal life policy, the insurance company declares a minimum interest rate.
  • This rate minimum is stated in the body of each contract.
  • The policyholder tends to have a number of options they can choose as interest-crediting strategies for the policy's cash value.
  • If the insurance company's investments perform better than the declared minimum rate, your cash value may be credited some of the growth.

An example of an interest-crediting strategy is a popular variant of the universal life insurance chassis: indexed universal life. Under this option, your cash value can earn interest based on positive changes in an index, like the S&P 500. The principal isn't subject to market risk. 

Differences Between Whole Life and Universal Life Insurance

Because of its design, universal life insurance can differ from whole life insurance in three ways: premium payments, guarantee of coverage length, and ways to earn interest.

In the case of premium payments:

  • With whole life insurance, premiums tend to remain level.
  • With universal life insurance, premiums are flexible and you may pay premiums as desired.
  • A UL policy may let you choose to pay higher or lower premiums over time, especially if your financial situation changes.
  • In a whole life policy, should you skip a premium payment, the premium amount is borrowed against the cash value as a loan with interest.
  • In a universal life policy, a skipped premium payment may simply be deducted from your cash value amount.
  • Keep in mind, however, that minimum premium amounts must be met or the policy will cease -- in turn, a lapsed policy may lead to a significant tax bill for the policyholder. 

 
Unlike whole life insurance, universal life insurance doesn't come with a guarantee of lifetime coverage. However, it is designed to provide lifetime coverage as long as you keep up with premium payments.

Another key difference is how universal life insurance receives interest. If the issuing insurance carrier sees growth in its investments that outperforms the declared minimum rate, a UL policy may be credited for some of the growth. A whole life policy doesn't have this same growth potential. However, this benefit may lead to a UL policy's cash value having some periods of relatively small growth. In those periods, a whole life policy's cash value growth may be higher.

Some Factors to Consider

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If you are gauging whether universal life insurance makes sense for you, ask questions. What goals or objective do you want your policy to accomplish? Are you considering life insurance options for more than just death benefit protection? Some other ways that people use universal life insurance are:

  • Building cash value to pay off debts or for high-cost expenditures
  • Providing reliable, lifelong protection for loved ones
  • Creating a source of income certainty for dependents should an insured decease
  • Establishing efficient protections for retirement assets
  • Supplementing other sources for retirement income
  • Building up wealth alongside other tax-advantaged vehicles, especially retirement accounts
  • Safe growth potential for money while reducing market risk 
  • Creating a tax-efficient wealth transfer to beneficiaries
  • Meeting estate tax obligations
  • Establishing an efficient business succession plan
  • Enjoying another safe option compared to low interest rates of CDs and similar vehicles


Consider the risks you are looking to manage. You will also want to think over your needs, goals, the associated costs of the policy, the guarantees of the policy, the strength of those guarantees, and the timespan for which you need the insurance. Keep in mind: many permanent life insurance policies in general will have higher premiums than term insurance. As such, they are a long-term commitment, and your household income should be sufficient to meet that commitment year-to-year.

With that said, if you are looking for lifelong coverage -- and benefits like possibly more cash value growth potential than whole life insurance may provide -- UL insurance may be an option to consider. 

Final Thoughts

Life insurance can bring peace of mind, but it's important to find the right choice for you. A qualified financial professional can help you navigate different life insurance options, understand their guarantees, weigh their positives and downsides, and discover possible solutions.

Many life insurance policyholders have benefited from guidance of someone who helped them simplify their research, reduce their shopping time-frame, and find answers. Are you ready to simplify your search?

If you ready for personal attention, or you have questions about your life insurance options, financial professionals at SafeMoney.com can guide you. Use our "Find a Financial Professional" section to connect with someone directly. Should you need a personal referral, call us at 877.476.9723.

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