Universal life insurance is a policy type that can provide lifelong coverage. After qualifying for and purchasing a universal life insurance policy, the holder can receive coverage in the amount of their policy—as long as the premium payments are kept up.
When the policy holder’s life ends, beneficiaries are provided with a tax-free death benefit (in the amount specified by the policy) to use as their financial needs dictate. Generally, a policy can name one or more people as beneficiaries.
Some universal life insurance policies also accrue cash value. In that case, the policyholder can withdraw accumulated funds or take out a loan against the cash-value. In this scenario, when the time comes, beneficiaries are paid the remaining balance (i.e., the benefit amount minus what’s been borrowed and not yet repaid).
People interested in buying life insurance may ask themselves, “What is universal life insurance?” Some other equally important questions include:
• What are the pros and cons of a universal life insurance policy.
• How do universal life insurance policies differ from term life insurance?
• Which types of life insurance policies fit different needs?
• Is an insurance agent needed to purchase a universal life policy?
• When might individuals want to buy universal life insurance?
Below is a helpful look at universal life insurance—including a discussion of how it usually works and how it diverges from other common kinds of life insurance.
Universal vs. Term Life Insurance
Life insurance comes in two main categories: term life and permanent life.
Let’s start with term life insurance. Term life provides coverage for a predetermined period of time, with policy durations often lasting between 10 to 30 years.
Now, by comparison, permanent life insurance options—including universal life and whole life—last for a person’s entire lifetime. They don’t expire after a set number of years has passed.
Term life tends to be simpler. Unlike some other forms of permanent insurance, term life insurance does not involve investments. So, with term life policies, no cash value accrues during the policy’s term.
Here’s a description of term life vs.whole life insurance.
Term life insurance policies are designed to cover the holder for a set amount of time. And, if the policyholder dies within that time window (aka “term”), the beneficiaries then receive the policy’s covered value (aka “death benefit”). Monthly payments are often fixed. The cost and coverage tied to term life insurance policies is fairly straightforward.
People sometimes choose a term life option, because they believe that they’ll have saved up enough money by the end of the policy’s term (and, thus, won’t need to withdraw funds).
They might also believe that, by the policy’s end, their beneficiaries will be financially independent. In any of these cases, consumers may not see a need for a life insurance policy that comes with a built-in cash value.
Term life insurance, in general, is less expensive than its whole life policy kin—often about three to ten times less for the same amount of coverage. Two reasons why include the fact that:
• Whole life coverage is permanent, rather than limited to a predetermined term
• More money needs to be contributed to whole life policies in order to build up cash value
So, what are the advantages of a universal life insurance policy?
Pros of Universal Life Insurance
For some people, the cash value component of universal life insurance can be appealing. After all, while policyholders themselves can’t financially benefit with term life insurance during their own lives, they may be able to if they choose a policy that can accrue cash value.
In a sense, universal life policies could be seen as a means to squirrel away a nest egg as well as to secure insurance coverage for beneficiaries. Universal life can be more versatile—since policyholders, as living individuals, can opt to use available funds, or to save them up for beneficiaries after their death.
Plus, when needed or desired, premiums of universal life insurance can be paid out of the accumulated cash value. Doing so will, of course, reduce the overall cash value of the policy but, when financial interests dictate, regular premiums can be paid in this way.
Here’s another benefit. Because a universal life insurance policy is permanent, holders don’t need to worry about expiration dates or spend time seeking a new policy after an old one expires.
Cons of Universal Life Insurance
Although universal life insurance has its benefits, the premiums are typically higher. Plus, the payments increase as a person ages. People looking to buy life insurance may want to analyze whether it makes sense to purchase a term policy and then invest the difference in premiums in a different way instead.
With universal life policies, the actual returns earned in the form of cash value can be unpredictable, too. That’s because the interest rate varies on these policies, changing along with fluctuating market conditions. So, the gains of one year may not predict the potential earnings (or losses) of the next.
Here’s something else to consider. Although a universal life insurance policyholder can borrow against their policy’s cash value insurance, interest must be paid on what’s taken out.
When the amount of cash available in a given policy is tapped out, an insurance provider may even opt to cancel the policy altogether. Some companies offer customers a 30-day grace period for missed payments.
But, generally, if a payment is not made within the insurance company’s payment parameters and the accrued cash value can no longer cover due payments, the policy is terminated. Beneficiaries are not paid anything from a terminated policy.
As one more con, universal life policies often come with other fees, which can include management fees, agent commissions, and/or administrative fees. In some cases, a “cash surrender” fee is charged.
When borrowing takes place, the policy owner could be charged what’s called a cash surrender fee. These fees can change over the life of a policy, generally decreasing as more money gets paid into the policy from year to year. Such fees are normally assessed to offset insurance providers’ operating costs.
So, when a whole-life policy is cashed out or borrowed against during the pre-set surrender time period, this fee is usually subtracted from the money that is then disbursed. With some policies, when the pre-established surrender period ends, a surrender fee is no longer charged.
Fees and surrender periods can vary from life insurance provider to life insurance provider. Often the surrender fee period or schedule is outlined in the insurance policy’s prospectus or contract.
What is Right For Me?
Life insurance policies, no matter the type, have a common goal: helping people and families when financial needs arise after a tragic loss. When someone dies, especially when they’ve been providing financial support for others around them, a death can have serious financial implications.
Funds provided to beneficiaries from the life insurance company can provide an added layer of financial security. This can be the case, for example, when there are minor children, or when there is a mortgage and other debts that still need to be paid off.
Beneficiaries can use payouts to cover major expenses—such as housing, medical bills, educational costs, child care, and/or other financial needs. In some instances, beneficiaries may use payouts to pay unsettled estate taxes or bills.
When deciding what type of policy to purchase, life insurance shoppers might want to calculate how much money is needed to adequately protect their designated beneficiaries.
The amount needed will vary according to individual situations, debts and outstanding financial responsibilities.
Buyers considering a universal life insurance policy as an investment strategy may also want to ask themselves this question: Does the cost of this type of plan justify the benefits?
Long story short, selecting the kind of life insurance suitable for unique needs is a matter of how a person wants to invest their money and the level of control they want to exert.
Other variables —things like age, marital status, number of dependents, expected family income, and outstanding debts—may also affect which sort of life insurance policy a person may need or be eligible for.
To find out which life insurance policies or rates they may qualify for, individuals can request a quote from an insurance provider or agent.
Should I Get a Life Insurance Agent?
Individuals shopping for the right life insurance policy can, generally, get a quote by going directly to an insurance provider’s website or contacting an individual insurance agent. Additional information regarding the applicants’ finances, debts, age, and health may be requested during the life insurance application process.
There can be benefits to contacting an agent. Insurance agents are normally, by virtue of their job, better-versed in the ins and outs of various policies than the average consumer—they can explain the difference between term life insurance and whole life insurance policies, describing as well extra riders (i.e., supplemental coverage) that can be added to standard plans.
For those new to buying life insurance, having more information available during the decision-making process can be helpful. So, a credible insurance agent may be able to walk interested buyers through the fine print.
While many details of insurance policies are available online, the potential consequences or benefits of buying a given policy may not be obvious to a first-time life insurance buyer. Agents can serve as translators of the fine print.
It may be useful for individuals to research if an agent may be a helpful resource or not.
When to Buy a Policy
Buying a policy when young and healthy, typically, translates into lower monthly payments. Why? Well, life insurance, in general, is priced in part according to a person’s age and overall health to manage risk. Eligible buyers may be able to lock in a constant monthly payment with certain term life insurance providers.
What about people who have life insurance plans through their workplace? In some cases, employer-backed life insurance policies offer less generous coverage than plans available on the market—at times, just one to two times the employee’s annual salary.
While such policies that can provide a quick influx of cash in the event of a policyholder’s death, it’s unlikely to be enough to provide ongoing financial support for those left behind.
So, for many people, it can make sense to explore a second policy to protect families more fully. It’s worth noting that not all life insurance offered through work is portable—and, if it isn’t transferable, then the policy wouldn’t continue after the employee leaves a specific job or employer.
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Ladder policies are issued in New York by Allianz Life Insurance Company of New York, New York, NY (Policy form # MN-26) and in all other states and DC by Allianz Life Insurance Company of North America, Minneapolis, MN (Policy form # ICC20P-AZ100 and # P-AZ100). Only Allianz Life Insurance Company of New York is authorized to offer life insurance in the state of New York. Coverage and pricing is subject to eligibility and underwriting criteria. SoFi Agency and its affiliates do not guarantee the services of any insurance company. The California license number for SoFi Agency is 0L13077 and for Ladder is OK22568. Ladder, SoFi and SoFi Agency are separate, independent entities and are not responsible for the financial condition, business, or legal obligations of the other. Social Finance, Inc. (SoFi) and Social Finance Life Insurance Agency, LLC (SoFi Agency) do not issue, underwrite insurance or pay claims under LadderLifeTM policies. SoFi is compensated by Ladder for each issued term life policy. SoFi offers customers the opportunity to reach Ladder Insurance Services, LLC to obtain information about estate planning documents such as wills. Social Finance, Inc. (“SoFi”) will be paid a marketing fee by Ladder when customers make a purchase through this link. All services from Ladder Insurance Services, LLC are their own. Once you reach Ladder, SoFi is not involved and has no control over the products or services involved. The Ladder service is limited to documents and does not provide legal advice. Individual circumstances are unique and using documents provided is not a substitute for obtaining legal advice.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.