For most people, buying life insurance fulfills a key purpose — if you pass away and aren’t there to earn income for your family, your loved ones would still be covered with a layer of protection against financial hardship. But both term and whole life insurance come with a monthly payment that must be kept up with in order to keep the policy in place, and you may want and need more financial flexibility in your life. Perhaps you’re a business owner, with fluctuating capital and loan needs, or a salesperson who gets partly paid in commissions or bonuses that are never quite certain each year. If you want the reassurance that life insurance provides, while building a significant financial asset and simultaneously allowing for a degree of variability in your income or cash flow, universal life insurance might be the answer.
What’s Universal Life Insurance?
Universal life, one of the key types of permanent life insurance, offers insurance for your entire life, as well as cash value accumulation, which is money you can use during your lifetime. Universal life insurance allows for a high degree of flexibility, meaning that you can vary your premium payments.
A universal life insurance policy account covers you with life insurance that lasts your full lifetime. This protection for your loved ones won’t simply run out as a term life insurance policy does, and your beneficiaries will receive a tax-free sum of money whenever you pass away. At the same time, just like a whole life policy, a universal life insurance policy enables you to build cash value. However, universal life insurance can deliver financial flexibility in a way that a whole life insurance policy can’t, because the guarantees and level premium payments in a whole life policy require you to pay each month.
Universal life insurance policies offer you the freedom to raise or lower your life insurance premium payments, while having the same cash value growth potential as whole life. If you like choice, the universal life option allows you to adjust to your life circumstances. Having another child, or moving on to a different job, or one day taking out a loan to buy a business — all might be instances where a combination of security and flexibility becomes important.
This type of policy might suit you if you’re envisioning significant income fluctuations or you think that you may want the ability to vary your payments.
Benefits of Universal Life Insurance
- Lifetime protection.You’ll be covered with a universal life insurance policy to financially protect your loved ones throughout your entire lifetime. It’s permanent protection and doesn’t expire at the end of a set term. Provided that you keep the account in good standing (regular contact with your financial professional will help make sure), this coverage can’t be canceled by the insurance company. As you grow older, in all likelihood, term insurance or other policies will cost significantly more and, on top of that, will be much harder to get. With universal life insurance, you’re still covered for life, whether your health deteriorates or not. The tax-free sum of money your loved ones would get when you pass away, known as a death benefit, is guaranteed.
- Cash value accumulation. Since universal life is permanent insurance, you’ll have a built-in portion of money that grows over time, called cash value. As it accumulates, the cash portion will earn interest that builds up over time. You can borrow against this cash value as a loan, or as income, and the account will grow interest at the rate determined by the insurance company’s success (this rate can vary). Any interest within the account is tax-deferred, meaning that it’s not taxed while it’s growing. Use the policy account in whatever way suits you, keeping in mind that it will affect the amount your loved ones receive when you’re gone or could even void the insurance coverage. It’s important to know that with the flexibility and freedom universal life allows, there are responsibilities.
- More flexibility in payments. The money you pay-in every month to purchase your life insurance coverage is called your premium. In a whole life policy, this premium is a fixed payment of a set dollar amount. In a universal life insurance policy, you can raise or lower those payments as you see fit, within the limits of the policy. Paying in less could eventually result in the need to pay higher premiums in later years to keep your coverage. This option means that your premium payments could vary, providing flexibility to keep your policy in force your entire life.
- Tax advantaged. The interest that accumulates within your account is not taxed while it’s building up, meaning the accumulation of your cash value may be faster. Tax policies and rates may vary depending upon IRS requirements and your income. Be sure to review these with your financial professional.
- Option to enhance your features. With the added flexibility of universal life insurance policies, a number of options, or riders, can be selected. These choices are customizable to provide you with policies aligned with your particular needs. Riders might allow you to add long-term care as you grow older, determine how to extend the coverage to your spouse or allow you to use the death benefit for care if you develop a critical illness.
With Universal Life Insurance, You Don’t Benefit From Dividends.
Unlike a whole life insurance policy, with universal life, you would not receive annual payments from profit sharing of the insurance company (mutual insurance companies pay dividends in good years).
Variable Universal Life: The Potential To Grow Your Cash Savings
Variable universal life insurance is another form of permanent life insurance. It shares features with universal life, but offers one key difference: the ability to invest in the stock market.
The cash value of your variable policy — in other words, that portion that accrues as an asset — may be invested in the market through a separate account. This means you’ll have the potential to increase that cash value if the market rises. However, you'll also bear all risks associated with investing in the market, including the risk of losing the original amount you invested (called your principal).
Benefits of Variable Universal Life Insurance
- Lifelong life insurance coverage. As with all permanent life insurance, variable universal life insurance policies provide coverage throughout your entire lifetime.
- Cash-value accumulation. You have the potential to build a cash asset with variable universal life insurance. If the cash value portion grows, you may be able to borrow against it, withdraw the cash or skip paying premiums — among other features — still keeping your insurance coverage, depending upon whether your cash value meets certain requirements.
- Multiple investment choices. We offer an array of investment choices to suit your risk tolerance. Talk to a financial professional to learn more.