What Is Universal Life (UL) Insurance?

Universal life (UL) insurance is permanent life insurance (lasting the lifetime of the insured) that has an investment savings element and low premiums similar to those of term life insurance. Most UL insurance policies contain a flexible-premium option. However, some require a single premium (single lump-sum premium) or fixed premiums (scheduled fixed premiums).

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What's Universal Life Insurance?

Key Takeaways

  • Universal life (UL) insurance is a form of permanent life insurance with an investment savings element plus low premiums.
  • The price tag on universal life (UL) insurance is the minimum amount of a premium payment required to keep the policy.
  • Beneficiaries only receive the death benefit.
  • Unlike term life insurance, a UL insurance policy can accumulate cash value.

How Universal Life (UL) Insurance Works

A UL insurance option provides more flexibility than whole life insurance. Policyholders can adjust their premiums and death benefits. UL insurance premiums consist of two components: a cost of insurance (COI) amount and a saving component, known as the cash value.

As the name implies, the COI is the minimum amount of a premium payment required to keep the policy active. It consists of several items rolled together into one payment. COI includes the charges for mortality, policy administration, and other directly associated expenses to keeping the policy in force. COI will vary by policy based on the policyholder’s age, insurability, and the insured risk amount. 

Collected premiums in excess of the cost of UL insurance accumulate within the cash value portion of the policy. Over time the cost of insurance will increase as the insured ages. However, if sufficient, the accumulated cash value will cover the increases in the COI.

Advantages and Disadvantages of Universal Life (UL) Insurance

Cash Value

Much like a savings account, a UL insurance policy can accumulate cash value. In a UL insurance policy, the cash value earns interest based on the current market or minimum interest rate, whichever is greater. As cash value accumulates, policyholders may access a portion of the cash value without affecting the guaranteed death benefit. However, the withdrawals will be taxed.

Also, depending on when the policy and premium payments are made, earnings will be available as either last in, first out (LIFO) or first in, first out (FIFO) funds. Upon the death of the insured, the insurance company will retain any remaining cash value, with beneficiaries only receiving the policy’s death benefit.

Universal life policyholders may borrow against the accumulated cash value without tax implications. However, if they do, interest will be calculated on the loan amount, and there will be a cash surrender fee. Unpaid loans will reduce the death benefit by the outstanding amount, with unpaid interest on the loan deducted from the remaining cash value.

There are no tax implications for policyholders who borrow against the accumulated cash value of their UL insurance policy.

Flexible Premiums

Unlike whole life insurance policies, which have fixed premiums over the life of the policy, a UL insurance policy can have flexible premiums. Policyholders can make payments that are more than the COI. The excess premium is added to the cash value and accumulates interest. If there is enough cash value, policyholders may skip payments without the threat of a policy lapse.

That said, policyholders must be attentive to the rising cost of insurance as they age. Depending on the credited interest, there may not be enough cash value to keep the policy in force, thus requiring them to pay higher premiums. Missed payments must be paid within a specific time frame for the policy to remain in force.

Why consider buying universal life?

For one thing, UL insurance policies, unlike term life, can accumulate interest-bearing funds like a savings account. Also, policyholders can adjust their premiums and death benefits. Holders paying extra toward their premium receive interest on that excess.

Do UL policies have downsides?

Holders must keep their eyes on fees. They will be taxed on cash withdrawals. Interest is charged on loans. And holders must pay attention to rising premiums as they age. There's a chance enough cash may not be be available to keep the policy active, and the holder will be forced to pay higher premiums.