What is Universal Life Insurance

By February 1, 2020 Blog No Comments

Universal life insurance is a type of permanent life insurance that allows policy owners to decide how much premium to pay (as long as certain minimum costs are met), when to pay premiums, and how much the death benefit will be. Universal life insurance is great, but there is a lot to learn about it before you decide that it is the right coverage for your situation. It’s worth looking into because there are many benefits to these kinds of plans, and you can personalize these plans to make them perfect for you.

When you purchase universal life insurance, the policy will provide for a level-planned premium amount. But, you don’t have to worry about making regular payments each pay period, like monthly or quarterly. You can opt to make larger or smaller payments as frequently or non-frequently as you desire. With every payment you make, your insurance company will deduct a portion for administrative expenses related to your policy. The remaining money is then credited to a cash value account. The cost of insurance coverage is deducted from the cash value account each month. 

Your policy will remain stable as long as you maintain a balance in your cash value account. This works even if you didn’t make the planned premium payments. Your cash value accumulates tax deferred at an interested rate that is determined by the company you’re using. 

With universal life insurance, you can decide to increase or decrease your policy’s death benefit as your financial status changes. You can basically lower the death benefit at any point in time, but if you want to raise the amount of coverage you’re going to need to go through the company’s underwriting process again. This might require a new medical exam. 

One of the positive, unique features of a universal life insurance plan is that you can choose a level or enhanced death benefit. The level benefit option is pretty much known as option 1, or option A. If you choose this option, your beneficiary will receive a guaranteed minimum amount when you die. This amount is made up of the cash value. But at this point, the pure insurance known as the “net amount” would be at risk. The higher the amount of the cash value, the lower the amount of insurance coverage you must pay. 

For example, if you have a $200,000 policy with %50,000 of current cash value, then you pay the cost of only $150,000 of pure insurance coverage. Your premium requirement would be lower than if you had no cash value and the full $200,000 of coverage. 

Option 2, AKA option B, allows you to add the cash value to the face amount when the death benefit is fully paid. So, for example, if you die when you have $50,000 of cash value within your $200,000 policy, then your beneficiary will receive $250,000. This option is not free, however. The increased benefits mean that you have to pay $200,000 of pure insurance coverage throughout the life of the policy. This is true no matter how much your cash value grows. 

Your life insurance contract, as well as the annual statement of your universal life policy, will reveal all aspects of its cost structure. This includes the monthly cost of insuring your life, expenses, and also the amount of interested that is credited to your cash value account. This information is not something that is available on the contracts and annual statements of other kinds of policies. Once you purchase your policy, you can’t manage a universal life policy except for death benefit, premium changes, and loans. 

You can obtain loans from your insurance company by using the cash value of your universal policy as collateral with most permanent life insurance policies. Loans have interest based upon current or fixed rates. If you borrow against the cash value of your policy, your cash will be affected. You should be aware that if you cannot pay back a loan, the proceeds payable to your beneficiary will be reduced. They will be reduced by the amount of all outstanding loans and interest remaining at the time of your death. 

Another great, unique feature of universal life insurance is that it will allow you to take partial withdrawals from your policy’s cash value. You might be able to take out up to 90% of the cash value, depending on what type of policy you have. But, these withdrawals are permanent and will permanently reduce your policy’s death benefit. 

Withdrawals are usually not allowed in the first few years of your policy. 

Partial withdrawals are almost always tax-free because the principal is withdrawn first, before taxable interest or gains in the overall cash value. However, you should always communicate with your insurance company, broker, or agent before making any type of withdrawal. 

About Woven Capital

Aaron Hatch is a Certified Financial Planner and co-founder of Woven Capital, a fee-only financial planning and investment management firm that specializes in helping people balance life, work, and community. Aaron has been quoted in various publications, including The Chicago Tribune, US News and World Report, and the Huffington Post among others. Aaron can be reached at aaron@wovencapital.net