What You Need to Know About Universal Life Insurance

Term life insurance is a short-term contract between you and your life insurance company that provides death benefits to your loved ones if you pass away while the contract is in effect. Whole life insurance offers the same benefit without an expiration date. Whole life also accumulates cash value as you pay premiums. So, what is universal life insurance? Here’s what you need to know about it.

Universal life insurance is permanent.

Term life insurance has an expiration date. Universal life insurance, like whole life insurance, is permanent. If the insured pays their monthly premiums, their beneficiaries should receive a death benefit when they pass on. The benefit amount will be determined by how much coverage is purchased. Most insurance companies have several options in that area.

The insurance company cannot cancel permanent life insurance unless the insured fails to make payments or is dishonest on their initial application. The company cannot cancel a policy if the insured starts smoking, gets sick, or buys other life insurance. The policy will remain intact through all these scenarios.  

Universal life insurance has a cash value.

Universal life insurance is an investment, not an expense. It accumulates cash value each time the insured pays their monthly premium. Term life insurance doesn’t do that. With universal life, a portion of the premium goes towards administrative fees. The rest is applied to the cash value of the policy. That cash value is an asset that can be used by the insured as: 

• Surrender value: If the insured decides to cancel the policy, the cash value becomes the “surrender value” of the policy. That’s the amount the insured will receive back in cash after the cancellation is processed.
• Loan collateral: Lenders recognize the cash value of a universal life insurance policy as an asset. The policyholder can use it as collateral for a secured loan.  
• Premium payments: Universal life policyholders often pay extra in the early years of their contract to build cash value. That cash value can be used to pay premiums, a feature that could come in handy when the insured reaches retirement age.   

Universal life insurance is flexible.

Universal life insurance looks a lot like whole life insurance. The difference is flexibility. Policyholders can adjust their premium and death benefit during the life of the contract if their financial situation changes. That’s not an option with whole life or term life insurance. Some universal life policies also allow the insured to take withdrawals from their cash value.

Universal life insurance can be guaranteed or variable. The variable version allows the insured to invest their cash value in stocks and bonds. That adds an element of risk but could significantly increase the cash value if the money is invested properly. Speak with an insurance agent or an investment advisor before making those investment decisions.    

Universal life insurance has a maturity date.

Universal life insurance policies don’t expire but come with a maturity date. That’s the point when the insured essentially “ages out” of the policy. That age is usually between 85 and 121, depending on the insurance company. Upon maturity, the policyholder will receive either the death benefit or the cash value of the policy, whichever is higher.

Maturity dates are set for an age that is beyond the average life expectancy. Living past that age could mean living without life insurance coverage. To offset that burden, policyholders should make sure they don’t draw too much of the cash value for retirement expenses or to pay premiums. If the cash value goes to zero, the policy expires.    

Sources:

https://www.ramseysolutions.com/insurance/universal-life-insurance

https://www.forbes.com/advisor/life-insurance/universal-life-insurance/

https://www.valuepenguin.com/life-insurance/universal-life-insurance

https://www.nerdwallet.com/article/insurance/reasons-why-life-insurance-canceled

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