Universal life insurance is a whole life policy that is flexible in terms of benefits, premiums, and investments.
What is Universal Life Insurance?
Universal life insurance is a permanent policy that extends until old age or death and includes both death benefits and an investment fund, but unlike regular whole life, it offers flexibility that traditional whole life doesn’t by allowing you to adjust your policy’s premiums and payouts over time. This makes it a good middle-ground between whole and term coverage. Term coverage only lasts a specific amount of time, whereas whole life is traditionally not adjustable.
- The flexibility of universal life insurance comes from the policyholder’s ability to change premiums, benefits, and cash values over the course of the policy.
- Unlike variable life insurance, universal life insurance does not allow the policy holder to select investments.
- Universal life allows the policy holder to transfer money between death benefits and the insurance fund that provides cash value.
- Universal life insurance also allows the policyholder to use the interest from accumulated savings to help pay premiums.
Universal Life Insurance and Premiums
Universal life coverage uses premiums in two ways:
- Your overall premium goes toward keeping the death benefit in effect. This is called the Cost of Insurance (COI).
- The amount of your premium in excess of the COI and other policy charges are invested in the company’s general account and are credited with an interest rate that gets applied to the policy’s cash value.
How Does Universal Life Insurance Pay Out?
Universal life insurance pays out in two separate ways:
- Death benefits: An amount paid out to beneficiaries upon the death of the policy holder.
- Investment fund: A “tax-advantaged” investment fund that accumulates “cash value.” Typically, the longer you hold the policy, the better the payouts.