Universal Life Insurance

Like whole life, universal life is a form of permanent life insurance, but because of some added flexibility it is sometimes referred to as “adjustable life insurance”. Similar to whole life, universal life policies include a savings component in addition to the death benefit, giving cash value to the policy over time. 

When you pay your premiums on a universal life policy, a portion of the payment goes toward the life insurance while a separate portion is set aside for savings and investment. Where universal life differs from regular whole life is that the policyholder has more flexibility about choosing how much of your payment is divided among the two parts and where your money is invested. This is sometimes known as “flexible premiums”.  

Also diverging from whole life, which has fixed premiums, universal life policies allow you the option to increase or decrease your death benefit while subsequently increasing or decreasing your cash value.

With its added flexibility, universal life offers well-rounded protection for your family while providing investment options. Some of the key benefits of a universal policy include: 

• It lasts your entire lifetime – as long as premiums are paid, the insurance policy remains in force. 
• Forced savings – as mentioned, a portion of your premium payments gets set aside into a savings and investment account. 
• Access to liquidity – if you find yourself in a crunch and need liquid assets, you can adjust your premium payments or withdraw cash from your fund.  
• Flexibility – you can increase or decrease the face value of your policy as your needs and circumstances change. 
• Earning interest – the savings component of your policy earns interest, which can actually be used to help cover the cost of the monthly premiums.  
• Earnings upside – when the insurer’s investment portfolio does well, so does your rate of return, meaning the value of your savings can grow at a higher rate.

Because everyone has different lifestyles, family situations and circumstances, any insurance policy is rarely a one-size-fits-all solution, and a universal life policy can have some drawbacks.  

• Not a guaranteed rate of return – while there is upside on return in times of good performance, that means there is the counterbalance risk of poor performance. If the policy portfolio doesn’t perform well, estimated returns aren’t reached. 
• Surrendering the policy – if you’re forced to cancel, or surrender the policy for any reason, charges and fees reduce the cash value you can recover from the policy.  
• Fees for withdrawal – taking cash from the account does come with fees, and it’s also worth noting that extracting this cash value from the policy reduces the amount of the death benefit. 

Universal life policies are more intricate, and therefore more complicated, than a term life policy. There are also different variations of universal life policies. A few examples are: 

• Indexed policies – in an indexed life insurance plan, the cash value is linked to a stock index, such as the Dow Jones Industrial Average or the S&P 500. When the market performs well, your cash value grows faster. Of course, if the market struggles, the value will drop.  
• Guaranteed policies – if the volatility of tying your premiums and policy performance to the stock market seem a little too risky for you, a guaranteed universal life policy levels the premiums – but also sets the interest rate. Guaranteed policies are the least volatile, but generally offer the least return toward building cash value.  
• Variable policies – these policies invest the cash value portion into a mutual fund as opposed to a stock-based index. 

Not every individual needs permanent life insurance. Your stage of life, family situation and estate planning goals will all play a role in what coverage and policies might fit best for you. It’s important to discuss these with an experienced and knowledgeable agent that can help determine where your investment provides the most return for your goals.