Understanding Universal Life Insurance

There are plenty of possibilities available if you're on the life insurance market. And if you are looking for a lifetime policy, universal life insurance is one option worth considering.

You can get lifelong coverage with universal life insurance. The death benefit is payable to your beneficiaries without tax. The death benefit is paid. Some universal policies also create cash, with tax-free gains. Universal living policies generate cash value, with tax-free gains increasing. And, depending on the policy, you can have flexibility to adjust prize payments and death benefits.

You will learn about universal life insurance. We will follow through. When considering these policies, make sure that you work with a trusted financial adviser or life insurance agent. It can be difficult.

How Does Universal Life Insurance Work?

Universal life insurance is a form of permanent life insurance. You can cover the length of your life, while paying the premiums. A cash component also comes in some forms of universal life insurance.

The value of cash can increase investment gains (and sometimes get hit with losses, depending on the policy type).

You can withdraw money or a loan from the cash value. The insurance firm reduces the amount of any withdrawals or outstanding loans to your beneficiaries if you die. But it is more important for some buyers to obtain a cash value than to pay recipients later.

See CompareInsurance ratings for cash value policies of the best life insurance companies.

You can add a number of riders to universal life policies, like other life insurance policies, including whole life insurance and term life insurance. Riders can add extra coverage or characteristics, usually at a surcharge.

An example of this is an accelerated mortality benefit rider. Often included with policies at no extra cost, if you are diagnosed with a terminal disease you can use money on your own death benefit. (The rules for tapping the cash vary according to the company.) Other common choices are chronic illness riders and long-term care workers, who both allow you to take money from death if you have certain conditions for your health.

Types of Universal Life Insurance

There are a couple of common kinds of universal life insurance policies, and understanding what you are buying is crucial. They have quite different costs and characteristics.

Compare: Types of Universal Life Insurance

Here’s how universal life policy types stack up in terms of premiums being paid into them, according to LIMRA, an industry research group. This based on total individual life insurance premiums in the first quarter of 2020:

• Guaranteed (fixed) life: 10% 
• Indexed universal life: 24%
• Variable universal life: 7%

Guaranteed Universal Life Insurance

A guaranteed universal life(GUL) insurance policy offered a death benefit and premium payments that will not change over time. A GUL policy provides a lifetime benefit. You choose the age of the policy to end (such as age 90, 95, 100, 105, 110, or 121). If you choose a greater age, the premium is increased.

Universal life insurance guaranteed generally has little or no value in cash. This is the cheapest kind of insurance that you can buy for universal living. The lifetime coverage is paid for.

The purpose of GUL is sometimes called "universal life insurance guarantee." This is to address recent problems in which conventional universal life insurance policies that were not guaranteed lapsed because the money value could not cover the expenses inherent in the policy and insurance costs. Some of the pursuing policyholders had to pay a far bigger premium suddenly than they ever expected to.

The new policy without delay promises to remain in force. But it's a catch: If you're paying late or missing one, it's probably going to end. Since the value of cash is usually no, no money is going to be collected. You'll keep the insurance company's payments.

A GUL policy offers no flexibility with premium payments or the death benefit amount, unlike other types of universal life insurance. However, a person who is primarily looking for lifetime coverage and cares less for the 'investment' component of the cash value can be a good choice.

What If I No Longer Want My Guaranteed Universal Life Policy?

Over the years, financial situations can change, and you may find that you do not want GUL policies anymore. As there's probably no cash value, if you're away from policy, there's no money to take.

However, some companies offer another way out: when you purchase the policy, you can add a premium rider return. These riders allow you to pay a partial or full refund of the premiums you paid, but only in some places after you purchase the policy.

AIG, American National Insurance Co.and Pacific Life, for example, are offering premium features on certain universal policies guaranteed. You can abandon the policy and receive some or all of your premiums within a period of 60 days after the policy purchase, such as 15, 20 or 25 years. The returned percentage is based on the year of business, the amount of the policy and/or the age at which the policy is purchased, depending on the company.

Here again, please ensure it has been included in the GUL policy before you buy this option.

Average Cost of Guaranteed Universal Life Insurance

Averages below are examples of annual rates for a $1 million GUL policy for healthy non-smokers, guaranteed to age 100 or older.

Indexed Universal Life Insurance

Indexed Universal Life Insurance provides lifelong coverage and may be flexible with the benefits and premiums of death. In certain limits, if your needs or budget changes, you may be able to adjust your mortality benefit and payments.

In IUL, there is an input in cash value often linked to an index on stocks, like a Nasdaq-100 or S&P 500. You may also be able to invest in fixed interest rates.

When you pay premiums, some of the money goes to policy fees and charges (potentially high), the rest goes to the cash value.

The limits of your potential investment gains are important to understand. The participation rates are limited to the indexed universal life insurance policies. The turnout is a portion of the index gains your cash value receives. For example, if you have a 10 percent increase in your index and a 50 percent participation rate, you will get 5 percent more. In addition, there is normally a maximum percentage cap which you can achieve irrespective of the performance of the index.

You still have a "floor" when your index plummets, guaranteeing a minimum rate of 0%. Nevertheless, if policy charges and charges eat through your money you can lose all of your cash value.

Owning an IUL policy does not mean that the index actually invests your money. Insurers still invest primarily in bonds in reality. So the index is only a cash value gains and losses calculated by a barometer. And you won't calculate your earnings if you have invested directly with any dividends you can otherwise pocket.

Although complex, universal indexed life insurance is a popular product. This may mainly be due to consultants that guide customers in such a way.

If you plan to buy indexed universal life, take a break to make sure that you understand what you buy. In July 2020, the Center for Economic Justice warned that customers should not purchase indexed universal life insurance. The consumer advocacy group refers to misleading and disappointing IUL sales practices.

"Consumers should avoid IUF because insurers and agents who sell the product do not have a duty to work in the best interest of the consumer. In a statement, Birny Birnbaum, director of the Center for Economic Justice, said that you mix massively complex products for juice illustrations, which are transparent and uncountable, and that are suitable in the event of financial catastrophe.

Consultants that sell IUL may introduce policies based on policy illustrations based on rosy images. Illustrations are frequently focused on unguaranteed policy elements, like cash value gains and cash-value loans that look like nothing will cost.

But these are just unguaranteed parts of policy, which could never happen. In order to maintain a policy in force, policyholders can potentially shell out far more in premiums.

Check out the guaranteed parts of a policy picture and ask yourself if this is true.

One way to get a better view of a policy is to ask your consultant or representative to ask Veralytic to provide you with a report on whether the product is suitable. Veralytic is a life insurance analytical company that measures the qualities of and offers cash value life insurance products.

Variable Universal Life Insurance

Universal life variable (VUL) insurance also enables you to vary premium and mortal benefit payments to a limited extent. You will usually need to manage this type of policy actively because you choose sub-accounts for your investments in cash value. You can also choose the cash value option for a fixed interest rate.

You can make good returns on your cash (if you have invested wisely) with variable universal life insurance, and you have a degree of control over your investments.

But if the investment choices go down, your cash value could also tank. These policies tend to be more expensive than others and often much more complex than other universal policies.

Other Types of Universal Life Insurance

Here you can find other varieties of UL:

• Cash buildup UL: a universal life insurance policy designed to quickly build up cash value.
• Assumption now in force UL: A traditional UL policy to offer low-cost coverage, because no guarantee of mortality benefits. Your cash value increases based on the insurer's "credit rate," so that the rate may change. You may change the payment times or amounts or change the mortgage allowance, but you need to ensure you have enough money in your policy account to cover insurance charges, the cost of insurance and any lending or withdrawals that you have received. The policy might lapse, if it is not. These policies were recently reviewed after large and unexpected premium increases were hit by some policyholders when their cash value decreased below the minimum demand.

How to Take Money from Cash Value

Usually you have some options if you are to take the cash value from a policy. Make sure you understand the rules of the policy to take cash value and all the financial consequences that this decision will have.

• Cancel your cash value money: a tax-free cancellation of your policy can be made. However, the investment gains you take are taxed in terms of income, if you withdraw more cash value than the share funded by your primary payments. Cash will also decrease your mortality benefit, and you will receive less from your beneficiaries.
• Credit your policy against: You can usually borrow tax-free from your policy's cash value. If you die before you repay the loan and interest, the balance remaining is removed from your death benefit.
• Remove the policy: You may contact the insurer to cancel the policy if you decide not to want or require life insurance. The cash value is reduced to every surrender fee.

Medical Exams for Universal Life Insurance

Many universal life insurance sellers take "full insurance" to complete their application and verify information and require your life insurance exam. This means that they take the time to complete their application. Typically, height, weight, blood and blood and urine samples are included in the medical examination. It is usually done by an insurance company hired paramedical professional and can be done at home.

Insurers can use a wide range of information about you in price policies. This includes consumer credit data, your prescription drug tracking history, your responses to previous individual applications for health and life, and your engine record. Insurers also often ask for your medical records.

Who Should Consider Universal Life Insurance?

You might consider a universal life insurance policy if you want life insurance coverage which takes the entire lifetime. For example, universal life insurance can fund a trust to look after a child or other dependents who have special needs after you have departed.

If you have long-term savings goals, both investment vehicles and life insurance, but have maximized other cost savings options, such as retirement plans, then you may also be considering a universal life insurance policy.

Check our ratings for the best life insurance companies.

Alternatives to Universal Life Insurance

For the situation of everyone, universal life is not the right choice. Depending on the policy length and guarantees you want, other types of life insurance may be better.

Whole Life Insurance: Lots of Guarantees at a High Cost

Like universal life insurance, whole life insurance provides you with life-long coverage. There is also a component of cash value. The main difference between whole life insurance and universal life insurance is the cost: The most expensive way for permanent life insurance is through the guarantee covered by the policy: premiums are guaranteed not to change, the death benefit is guaranteed and the value of the cash is guaranteed at a minimum guaranteed return rate.

Indexed and variable universal life can also make payments flexible and the death benefit after you purchase the policy.

On the other hand, entire life ensures that your premiums, the guaranteed value of cash and the mortality benefit will not change. Whole life insurance is suitable for those who want and are prepared to pay for the predictability.

Many whole life insurance policies are also paying dividends. These are like annual bonuses paid to customers, but not guaranteed, by mutual insurance companies. You can pay premiums with dividends, add them to your cash or just take the money.

Term Life Insurance: Cheapest Option

Term life insurance for 5, 10, 15, 20, 25 or 30 years is usually available. It has no component in cash value and you can exceed the policy. But this is the cheapest way of purchasing life insurance. For example, you could purchase a 20-year policy for the growing years of young children and school. Or a policy of 30 years when purchasing a house and taking out a mortgage.

It expires if you live beyond the term life policy. No cash value is to be removed. Therefore, it is good to best match your term life policy to the time you need coverage.