Universal life (UL) insurance is a lifelong coverage or protection, which you get after paying insurance premiums. It is a form of permanent life insurance that helps build tax-advantaged cash value and provides a death benefit.  You can gain a death benefit of USD 1 million to USD 100 million and even higher from universal life insurance. It is paid to the beneficiary mentioned in the insurance policy.  It offers flexible saving options—you can increase or decrease your premiums within the defined limits. It is cheaper than whole life insurance, but the death benefit in UL insurance would be affected if you underpay for too long.

How Universal Life Insurance Works?

Universal life insurance comprises two components: 
  1. Cost of insurance (COI) 
  2. Cash value or surrender value. 

Cost of Insurance (COI)

COI is the part of insurance premium that covers the mortality risk associated with the insured’s life.  It is the price of sustaining the policy. The minimum amount that you pay for this purpose is called “element.” COI is influenced by various factors such as: 
  1. The policyholder’s age
  2. The policyholder gender
  3. The policyholder's health
It increases with age, indicating an increased mortality risk. It includes the cost for life coverage, contract handling, and other expenses needed to keep the policy functional. 

Cash Value / Surrender Value

Surrender value is a saving component that increases over time. You get it upon canceling or deactivating the insurance contract. It is a part of your policy and you can pay more premiums anytime to increase it. You can also borrow from it when needed. The cash value earns interests on a fixed rate or indexed through the market index. Associating cash value growth to an index offers a potential for higher gains. However, there is a risk of lower gains if the market generates lower returns. 

What are the Types of Universal Insurance?

Here are the three types of universal insurance:
  1. Guaranteed universal life (GUL)
  2. Indexed universal life (IUL)
  3. Variable universal life (VUL)

Guaranteed Universal Life (GUL)

GUL or standard UL insurance “guarantees” the cash value growth over time at a fixed interest rate. GUL insurance saves you from low returns when the market underperforms and provides high returns when market rates increase. It is tax-advantaged and can be withdrawn in time of financial need.

Indexed Universal Life (IUL)

In Indexed universal insurance, the interest on cash value depends upon the stock market index determined by the insurance company. The cash value growth can fluctuate depending on the equity index account. However, the IUL contract offers an interest rate guarantee. 

Variable Universal Life (VUL)

In variable universal life (VUL) insurance policy, the increase in cash value depends on market fluctuations. It generates high interest but can also result in losses. It is similar to variable life insurance in many aspects. However, it allows you to revise the premium payment amount. 

What are the Key Features of Universal Life Insurance?

Here are the 5 key features of universal life insurance:
  1. Flexible premium payments
  2. Adjustable death benefit 
  3. Tax-deferred cash value accumulation
  4. Option to borrow from or withdraw cash value
  5. Potential market linked growth (in IUL/ VUL)

Flexible Premium Payments

Universal life insurance offers premium flexibility, allowing a policyholder to increase or decrease their premium payments within defined limits. You can make premium payments higher than COI so that the excess amount is added to cash or surrender value. You can also skip payment without any loss if there is enough cash value.

Adjustable Death Benefit

Adjustable death benefit allows you to raise or lower your death benefit depending on your financial situation and changing needs. The increase of the amount requires a health assessment whereas the decrease lowers your premium payment. 

Tax-deferred Cash Value Accumulation

Universal life (UL) insurance offers tax-free cash value growth. A policyholder does not have to pay taxes on their earnings or interest. 

Option to Borrow From or Withdraw Cash Value

Universal life insurance allows you to borrow from or withdraw money against the policy’s cash value. You can borrow up to 90% of your cash value. You can request a loan for any reason without needing credit approval. However, you need to consider the interest rate, repayment schedule, and the policy’s terms and conditions. Also learn what will happen if you fail to pay back.   

Potential Market Linked Growth (in IUL/ VUL)

The cash value growth in indexed and variable UL insurance is associated with the potential market. In IUL, the cash value growth depends on market indices, offering greater potential for high returns. However, it also carries a market risk.  VUL provides direct investment options to the policyholders, offering greater potential for higher gains, but a higher risk as well.

Who Should Consider Universal Life Insurance?

These individuals should consider life insurance:
  1. Flexible coverage needs
  2. Long-term growth potential
  3. Estate or wealth planning
  4. High-earners 

Flexible Coverage Needs

Universal life insurance offers flexibility in:
  • Premium payments
  • Use of cash value
  • Death benefit
UL insurance benefits individuals with flexible financial needs. It allows you to generate cash value that can be borrowed or withdrawn for future needs.

Long-Term Growth Potential 

Universal life insurance ensures cash value growth. IUL and VUL link your cash value to market performance. Investing your cash value in the market increases the potential for higher results, although outcomes are not guaranteed. It is a great option for people who are looking for tax-free savings linked to the market performance. 

Estate or Wealth Planning

UL insurance is also useful for leaving a legacy or managing inheritance taxes. It offers all-time access to cash value, offering liquidity to pay debts or estate taxes without selling off your property or other assets. 

High-Earners

It allows the high earners to supplement their retirement income with an easy access to cash value. Retired individuals can withdraw or get a loan from the cash value, especially if their 401(k) plan or individual retirement account (IRA) has limitations.