What Is Universal Life Insurance?

This article will discuss how universal life insurance works, its pros and cons, why it stands apart from other life insurance types, and expected costs.

By not carefully selecting a permanent form of life insurance, like universal life insurance, you might end up with a cheaper term policy only to find out after the fact that it has an expiration date, and you’ll need a new (and more expensive) option down the line.

Rather than pay monthly premiums only to have it all end prematurely, a universal life insurance policy can give you peace of mind that you are covered permanently, and your policy will always be there.

Universal life insurance differs from whole life insurance because it has flexible premiums, flexible death benefits, and more variety for cash value accounts. Namely, you can adjust your premium payments throughout the span of the policy and even change your death benefit amount in some cases.

How Universal Life (UL) Insurance Works

The biggest feature of a universal life insurance policy is the ability to adjust your premium payments or death benefit. You have the ability to pay extra toward your premium, and that extra can earn interest as well.

As you age, you may no longer need the same financial protection level as when you took out your policy. With a universal policy, you can reduce your death benefit as your needs decrease.

Assuming you make your premium payments, your policy will remain in effect permanently.

While you are still alive, you can utilize the cash value component of that policy, which means you can take money out of it in the form of a direct withdrawal, a policy loan, or even use it toward your premiums. However, any remaining money in that cash value account is forfeited back to the insurance company when you pass away.

According to a Forbes survey, 24% of people have no emergency savings. For that reason, the cash value account could serve as a form of savings for policyholders and their families.

Only 65% of people could survive for three months if they lost all income. Borrowing against a cash value account is something that can be done multiple times throughout the length of the policy, based on returns.

Advantages and Disadvantages of Universal Life Insurance

As is the case with any policy, there are advantages and disadvantages.

Universal Life Insurance Benefits Explained

There are many benefits, depending on your needs:

Flexible Premiums

Premiums with a universal policy will fluctuate with the market, so what you pay one year might be different from the next. However, these fluctuations stay within a predetermined range, so you can still budget accordingly.

Possible Flexible Death Benefit

In some cases, you are able to change the death benefit amount throughout your policy. This can help you reduce or expand coverage based on life events. Note that your premiums may change as well.

Potential Cash Value Growth

Universal life insurance policies accumulate a cash value that can grow with the policy. This is another cash benefit that can be left to beneficiaries (or used by the policyholder) with favorable tax implications.

Allows Policy Loans

A policyholder can withdraw or borrow against their cash value account.

Tax protection

According to recent updates to tax code 7702, a policy loan from, for example, a universal life insurance policy is tax-free. Even though it earns money like an investment account, it is not taxed as one.

 Flexibility

Like many policies, you can choose to pay premiums each month or year. You can also change the death benefit after a policy is taken out or add riders.

Length of universal life coverage

Universal life insurance policies will remain in effect until you pass away, as long as you pay your monthly or yearly premiums.

Universal Life Insurance Drawbacks Explained

Risk of large payment requirements or policy lapse

There is a risk of large payment requirements. With a universal life insurance policy, your premiums will fluctuate with time. They typically stay within predetermined parameters, but it can still be very expensive with very little notice.

While you can use money in your cash value account to put toward your premiums, there may not always be enough, and this can result in a policy lapse if you are unable to pay.

Returns are not guaranteed

The cash value account gains money based on market performance, so there’s no guarantee that it will do well or provide a specific dollar amount.

Some withdrawals are taxable

You are able to withdraw money directly from your cash value account, and while you receive favorable taxation for many of the financial transactions associated with this account, some of them are still taxable as income.

Cash value lost at policyholder’s death

The cash value accounts associated with a universal life insurance policy are designed to be used while you are still alive, although they don’t necessarily accumulate a substantial enough amount to apply toward premiums or a loan for about 10 to 15 years.

When you pass away, any remaining cash value goes back to the insurance company, not your family, so you lose it all if you don’t use it.

Guaranteed Universal Life Insurance

Guaranteed universal life insurance guarantees that your premium payments don’t change, unlike other Universal policies. You choose the age at which your policy ends, like age 100 or 110. The higher the age you choose, the higher your premiums will be.

Traditional universal life insurance policies might lapse if there isn’t enough cash value to cover the premiums, and the policyholder can’t pay the premiums either. With guaranteed universal life insurance, the cash value is much lower, but your premiums remain the same, and your policy doesn’t lapse unless you miss a payment.

This is better for someone who wants permanent coverage but doesn’t necessarily want the investment aspect of the cash value account to borrow against.

Average Cost of Guaranteed Universal Life Insurance

The table below provides the average cost for a guaranteed universal policy for healthy individuals of different ages, with $1,000,000 in coverage:

Indexed Universal Life Insurance

Index universal life insurance coverage is a permanent policy that lets you adjust your death benefit and your payments. Your cash value account is directly tied to a specific stock market index or multiple indexes. Part of the premiums you pay goes toward the fee of maintaining your policy, and part of it goes into that cash value account to be invested.

There’s usually a limit on what percentage you can gain from your Investments regardless of the performance of your index. There is also a minimum return rate that is guaranteed, although that minimum can be 0%.

Average Cost of Indexed Universal Life Insurance

The table below provides the average cost for a guaranteed universal policy for healthy individuals of different ages, with $250,000 in coverage:

Variable Universal Life Insurance

This type of policy is a permanent policy that lets you change your premiums or death benefit within predetermined limits throughout the policy. Variable universal life insurance is a similar investment vehicle, but you need to manage it more. You also have the option of, in some cases, choosing a fixed interest rate associated with your cash value account.

This is better for people who want to actively manage the investments associated with their cash value account, but it still comes with risks as the performance is tied to the market.

Average Cost of Variable Universal Life Insurance

The table below provides the average cost for a variable universal policy for healthy individuals of different ages, with $250,000 in coverage:

Survivorship Universal Life Insurance

Survivorship universal life insurance is different from others in that it usually offers insurance for two people, two spouses. The policy then pays out once both have passed away, not just one.

Average Cost of Survivorship Universal Life Insurance

The table below provides the average cost for a survivorship universal policy (for each) for healthy individuals at different ages, with $250,000 in coverage:

Joint Universal Life Insurance

If you need a policy that pays out upon the death of one of two individuals, a joint universal life insurance policy is a better option. This is a policy for two people, usually a couple, which offers a death benefit paid out when either individual passes away, unlike survivorship, which only pays out when both individuals pass away.

Average Cost of Joint Universal Life Insurance

The table below provides the average cost for a joint universal policy for healthy individuals of different ages, with $250,000 in coverage:

Universal Life Insurance vs. Term Life Insurance vs. Whole Life Insurance

Universal life insurance offers a slightly more enhanced permanent policy as compared to a whole life insurance policy or a term policy. The table below shows some basic comparisons between the three of them:

Whole life vs. Universal Life Insurance

Whole life and universal life insurance are both permanent life insurance policies. However, universal policies can sometimes be less expensive than whole policies because they don’t have the same guarantees.

But you also get the ability to adjust the amount of your death benefit within certain parameters.

Universal Life vs. Term Life Insurance

Term life insurance can be adjusted to fit certain timelines or financial coverage, but at the end of a policy, unless you take out a convertible policy, your coverage expires, so you don’t get the permanent aspect of a universal policy. Similarly, you don’t get the cash value account against which you can borrow money.

How Much Does Universal Life Insurance Cost?

A review from LIMRA found that U.S. life insurance sales for Q1 of 2023 increased 4%.

The cost of a universal policy is affected by:

1. Your age
2. Your health
3. Whether you pay annually or monthly
4. Your gender

Universal Life vs. Whole Life Insurance Rates for Men

The table below shows the average annual premium of a universal policy with $500,000 in coverage for healthy males at different ages.

As you can see, the annual premiums for Universal policy remain significantly lower compared to a whole policy especially if you are older.

Universal Life vs. Whole Life Insurance Rates for Women

The table below shows the average cost of an annual premium universal policy with $500,000 in coverage for healthy females at different ages.

While the costs are reduced for females compared to males, the older you are the more expensive your premiums will be when you take out a new policy.

Is Universal Life Insurance Right for Me?

Universal life insurance is suitable for people who want financial protection for their loved ones long-term and not just for covering a single type of debt. Similarly, people who want to capitalize on the savings feature with the cash value component but not the extended risk or premium fluctuations of indexed or variable policies should consider a universal life insurance policy.