Universal Life Insurance: How It Offers Flexibility And Control

 

Life insurance is one of the most important financial decisions you can make for yourself and your loved ones. It can provide peace of mind, protection, and income replacement in case of your untimely death. But not all life insurance policies are created equal. Some offer more benefits and features than others, depending on your needs and preferences.

One type of life insurance that offers a lot of flexibility and control is universal life insurance. Universal life insurance is a form of permanent life insurance that lasts your entire life, as long as you pay your premiums. It also has a cash value component that can grow over time and be used for various purposes. And unlike other types of permanent life insurance, such as whole life insurance, universal life insurance allows you to adjust your premium payments and your death benefit amount according to your changing needs and circumstances.

But what exactly is universal life insurance and how does it work? What are the pros and cons of this type of life insurance? And how can you choose the right universal life insurance policy for your situation? In this article, we will answer these questions and more. We will explain what universal life insurance is, how it works, what types there are, what are the advantages and disadvantages, and how to choose the best policy for you. By the end of this article, you will have a better understanding of universal life insurance and how it can offer you flexibility and control over your life insurance coverage.

How Universal Life Insurance Works

Universal life insurance is a type of permanent life insurance that consists of two main components: the cost of insurance (COI) and the cash value. Let’s take a closer look at each of these components and how they affect your policy.

Cost of Insurance (COI)

The cost of insurance (COI) is the amount that you pay to keep your policy active and to ensure that your beneficiaries will receive the death benefit when you die. The COI covers the mortality risk, which is the likelihood that you will die within a given year, as well as the administrative expenses and other fees associated with maintaining your policy.

The COI varies depending on several factors, such as your age, health, gender, lifestyle, and the amount of coverage you have. Generally speaking, the older and less healthy you are, the higher your COI will be. The COI also increases over time as you age and your mortality risk goes up.

Cash Value

The cash value is the savings or investment component of your universal life insurance policy. It is the amount that accumulates over time from the premiums that you pay in excess of the COI. The cash value earns interest based on the performance of an underlying investment account that is chosen by your insurer or by you, depending on the type of universal life insurance policy you have.

The cash value can be used for various purposes, such as:

• Paying your premiums: You can use your cash value to pay part or all of your premiums if you want to lower or skip your payments for a period of time.
• Withdrawing cash: You can withdraw cash from your cash value at any time, up to the amount of premiums that you have paid into your policy. Withdrawals are tax-free unless they exceed this amount.
• Taking loans: You can borrow money from your cash value at any time, up to a certain percentage of your cash value. Loans are not taxable as long as you repay them with interest. However, if you die with an outstanding loan balance, it will be deducted from your death benefit.
• Increasing your death benefit: You can use your cash value to purchase additional coverage or riders that can increase your death benefit amount or provide additional benefits.

The cash value grows tax-deferred, which means that you do not pay taxes on the interest or gains until you withdraw or surrender them. However, if you surrender or cancel your policy before you die, you will lose any remaining cash value and may have to pay taxes on any gains.

Flexibility

One of the main features of universal life insurance is its flexibility. Unlike other types of permanent life insurance, such as whole life insurance, which have fixed premiums and death benefits for the duration of the policy, universal life insurance allows you to adjust these amounts within certain limits.

You can increase or decrease your premium payments as long as you pay at least the minimum COI to keep your policy active. You can also increase or decrease your death benefit amount as long as you meet the minimum and maximum requirements set by your insurer. You may have to undergo additional underwriting or medical exams if you want to increase your death benefit amount.

This flexibility can be useful if your financial situation or needs change over time. For example, you may want to lower your premiums or death benefit if you have less income or expenses, or if you have paid off your debts or other obligations. On the other hand, you may want to increase your premiums or death benefit if you have more income or expenses, or if you want to leave a larger legacy for your beneficiaries.

Types of Universal Life Insurance

Universal life insurance is not a one-size-fits-all product. There are different types of universal life insurance that offer different features and risks. The main difference among these types is how the cash value earns interest and how it affects your premiums and death benefit.

Here are the most common types of universal life insurance and how they work:

Guaranteed Universal Life Insurance

Guaranteed universal life insurance is the simplest and most conservative type of universal life insurance. It offers a fixed premium and a guaranteed death benefit for the duration of the policy, regardless of the performance of the underlying investment account. It also offers minimal or no cash value growth.

Guaranteed universal life insurance is similar to term life insurance, except that it lasts for your entire life instead of a specific term. It is also cheaper than other types of permanent life insurance, such as whole life insurance, because it does not offer the same guarantees or benefits.

Guaranteed universal life insurance is suitable for people who want lifelong coverage with a fixed and affordable premium and a guaranteed death benefit, but do not care much about cash value growth or flexibility.

Indexed Universal Life Insurance

Indexed universal life insurance is a type of universal life insurance that offers a variable interest rate for the cash value based on the performance of a stock market index, such as the S&P 500, the Dow Jones Industrial Average, or the Nasdaq 100. The interest rate can change frequently, depending on the fluctuations of the index.

Indexed universal life insurance also offers a minimum guaranteed interest rate and a maximum cap rate for the cash value. The minimum guaranteed rate is the lowest rate that the cash value can earn, regardless of how poorly the index performs. The maximum cap rate is the highest rate that the cash value can earn, regardless of how well the index performs.

Indexed universal life insurance is suitable for people who want to participate in the potential growth of the stock market without taking too much risk. It also offers more flexibility than guaranteed universal life insurance, as it allows policyholders to adjust their premiums and death benefit within certain limits.

Variable Universal Life Insurance

Variable universal life insurance is a type of universal life insurance that offers a variable interest rate for the cash value based on the performance of a selection of investment funds, such as mutual funds or exchange-traded funds (ETFs). The interest rate can change frequently, depending on the fluctuations of the funds.

Variable universal life insurance does not offer a minimum guaranteed interest rate or a maximum cap rate for the cash value. The cash value can grow significantly if the funds perform well, but it can also decline substantially if the funds perform poorly.

Variable universal life insurance is suitable for people who want to have more control over their investments and are willing to take more risk for higher returns. It also offers more flexibility than indexed universal life insurance, as it allows policyholders to choose from a wider range of investment options and adjust their premiums and death benefit within certain limits.

Equity-Indexed Universal Life Insurance

Equity-indexed universal life insurance is a type of universal life insurance that offers a hybrid of indexed and variable features. It splits the cash value into two portions: one portion is invested in an index fund and earns interest based on its performance, while another portion is invested in a fixed account and earns interest at a fixed rate.

Equity-indexed universal life insurance also offers a minimum guaranteed interest rate and a maximum cap rate for the cash value. The minimum guaranteed rate applies to both portions of the cash value, while the maximum cap rate applies only to the portion invested in the index fund.

Equity-indexed universal life insurance is suitable for people who want to have some exposure to the stock market but also some stability from a fixed account. It also offers more flexibility than guaranteed universal life insurance, as it allows policyholders to adjust their premiums and death benefit within certain limits.

Pros and Cons of Universal Life Insurance

Universal life insurance has many advantages and disadvantages that you should consider before buying a policy. Here are some of them:

Advantages

• Lifelong coverage: Universal life insurance provides coverage for your entire life, as long as you pay your premiums. This can be beneficial if you want to leave a legacy for your beneficiaries or cover any final expenses or estate taxes.
• Flexibility: Universal life insurance allows you to adjust your premiums and death benefit within certain limits, depending on your cash flow and needs. This can be helpful if your financial situation or goals change over time.

• Potential for cash value growth: Universal life insurance has a cash value component that can grow over time and earn interest based on the performance of an underlying investment account. This can provide you with a source of savings or income that you can access through withdrawals or loans.
• Tax benefits: Universal life insurance offers tax benefits for the cash value and the death benefit. The cash value grows tax-deferred, which means that you do not pay taxes on the interest or gains until you withdraw or surrender them. The death benefit is generally tax-free for your beneficiaries, unless it exceeds a certain amount or is subject to estate taxes.

Disadvantages

• Higher cost: Universal life insurance is more expensive than term life insurance, which only provides coverage for a specific period of time. This is because universal life insurance offers lifelong coverage and a cash value component, which require higher premiums and fees.
• Complexity and confusion: Universal life insurance is more complex and confusing than term life insurance, which has a simple and straightforward structure. Universal life insurance has different types and features that can affect your premiums, cash value, interest rates, fees, etc. You may need to consult with a financial advisor or an experienced life insurance agent to understand how your policy works and what options you have.
• Risk of policy lapse or reduced death benefit: Universal life insurance has a risk of policy lapse or reduced death benefit if your premiums are not sufficient to cover the cost of insurance (COI) or if your cash value declines due to poor investment performance. If your policy lapses, you will lose your coverage and may have to pay taxes on any gains from your cash value. If your death benefit is reduced, your beneficiaries will receive less money when you die.
• Fees and charges: Universal life insurance has various fees and charges that can reduce your cash value and death benefit. These include policy administration fees, surrender charges, withdrawal charges, loan interest, etc. You should review your policy illustration and disclosure carefully to understand how these fees and charges will affect your policy over time.
• Loss of cash value upon death: Universal life insurance does not pay out both the cash value and the death benefit when you die. It only pays out the death benefit, which may be equal to or higher than the cash value, depending on the type of policy and the performance of the investment account. This means that you will lose any remaining cash value upon death, unless you add a rider or endorsement to include it in the death benefit.

How to Choose the Right Universal Life Insurance Policy

Choosing the right universal life insurance policy can be challenging, as there are many factors to consider and options to compare. Here are some tips and guidelines that can help you make an informed decision:

• Determine how much coverage you need and for how long: The amount of coverage you need depends on your income, expenses, debts, assets, liabilities, goals, etc. You should calculate how much money your beneficiaries would need to maintain their standard of living and cover any financial obligations if you die. You should also consider how long you need the coverage for, as some types of universal life insurance policies may expire at a certain age or require higher premiums as you age.
• Compare quotes from different insurers and types of universal life insurance policies: You should shop around and compare quotes from different insurers and types of universal life insurance policies to find the best deal for your situation. You should look at the premiums, COI, cash value, interest rates, fees, etc. of each policy and see how they fit your budget and expectations. You should also check the ratings and reputation of each insurer to ensure that they are financially stable and reliable.
• Review the policy illustrations and disclosures carefully: You should review the policy illustrations and disclosures carefully before buying a universal life insurance policy. These documents show how your policy will perform over time under different scenarios and assumptions. They also show how the premiums, COI, cash value, interest rates, fees, etc. will affect your policy over time. You should understand how these factors will impact your coverage and benefits and what risks and guarantees are involved.
• Consider adding riders or endorsements to customize your policy: You should consider adding riders or endorsements to customize your policy according to your needs and preferences. Riders or endorsements are optional features that can enhance or modify your policy in various ways. For example, some common riders or endorsements are:
  • No-lapse guarantee: This rider guarantees that your policy will not lapse as long as you pay a minimum premium amount, regardless of the performance of the investment account or the COI.
  • Accelerated death benefit: This rider allows you to receive a portion of your death benefit in advance if you are diagnosed with a terminal illness or a chronic condition that requires long-term care.
  • Return of premium: This rider refunds all or a portion of your premiums if you surrender or cancel your policy within a certain period of time.
  • Other riders or endorsements may include disability waiver of premium, accidental death benefit, child term rider, spouse term rider, etc.
• Work with a trusted financial advisor or experienced life insurance agent: You should work with a trusted financial advisor or experienced life insurance agent who can explain the details and options of universal life insurance policies and help you find the best policy for your situation. A financial advisor or a life insurance agent can also help you review your policy periodically and make adjustments as needed.

Conclusion

Universal life insurance is a form of permanent life insurance that offers flexibility and control over your coverage and benefits. It allows you to adjust your premiums and death benefit within certain limits, depending on your cash flow and needs. It also has a cash value component that can grow over time and be used for various purposes.

However, universal life insurance also has some drawbacks, such as higher cost, complexity, risk of policy lapse or reduced death benefit, fees and charges, and loss of cash value upon death. Therefore, you should carefully weigh the pros and cons of this type of life insurance and compare different types and policies before buying one.

If you are interested in learning more about universal life insurance and how it can offer you flexibility and control over your life insurance coverage, please contact us or visit our website for more information or assistance. We are here to help you find the best universal life insurance policy for your situation.