Universal Life

What Is Universal Life Insurance?

Universal Life is considered to be a permanent life insurance product designed to offer premium flexibility that other products do not offer. This flexibility allows a policy owner to overfund the account and grow cash value more aggressively and also allows a policy owner to decrease premium payments in times of financial hardship.

How Does Universal Life Insurance Work?

Universal life is more complex than whole life and term life. Some consider universal life to be a perfect mixture of term and whole life.

When a policy owner pays the premium, money is broken up and separated into a few different sections. Most of the money is added to the cash value, some of the money is used to buy term life coverage (whatever the face value is), and a small percentage is used to pay policy maintenance fees and commissions.

Universal life policies are designed to last until age 90-95 but can lapse if improperly funded. As the cost of insurance increases (remember, part of the premium is paying for term insurance) the policy becomes more expensive to maintain. A good strategy is to over fund the account early on so cash value can build. If a policy owner under funds the policy, the cash value is used to pay for the term life coverage (so that life insurance will stay in force). If the policy is underfunded, the cash value will eventually dwindle into nothing.

Who Should Buy a Universal Life Policy?

Universal life policies can accomplish the same goals that whole life policies accomplish. However, these policies are meant for people who have the ability to over fund the policy in order to generate a higher cash value. Some people use universal life policies as an asset protection tool or sometimes even a retirement vehicle.

It’s important to note that a universal life product (or any life insurance product) should not be considered an investment tool; although there are some investment characteristics, universal life is an insurance product.