Universal life insurance is often mistaken for whole life insurance.
Though the two policies have similarities, they differ in significant ways.
For instance, universal life insurance is considered a more flexible option, offering adjustable premiums and an adjustable death benefit.
However, it also requires more monitoring than a term life policy.
Here are some essential features you need to know about universal life insurance.
What Is Universal Life Insurance?
Universal life insurance is a type of permanent life insurance that covers the insured person for the duration of their life, as long as they pay premiums and fulfill any other policy requirements to maintain coverage.
If you plan to use life insurance as part of an investment plan, universal life insurance can be a great choice compared to other types of insurance, offering benefits such as:
- Lifelong protection, as long as premiums are paid.
- It builds cash value.
- Interest on the cash value.
- Flexible premiums.
- Flexible death benefit.
And since universal life insurance has a flexible investment component, the policyholder has more responsibility and an increased risk compared to other types of insurance, such as term life insurance.
Types of Universal Life Insurance
There are several types of universal life insurance, including:
- Traditional or non-guaranteed universal life policies are the most affordable, but the policy can lapse if you make changes to it.
- No lapse guaranteed universal life policies include everything a traditional policy does, but they don’t lapse if you make changes.
- Indexed universal life policies let you grow your cash value by placing it in a market index fund.
- Variable universal life policies can speed up cash value growth through various investments, such as the stock market.
How Does Universal Life Insurance Work?
Universal life insurance provides flexible life insurance options and includes an investment component. In addition, policyholders can adjust their premiums and death benefits.
It is essential to understand different components, such as:
- Premiums: The premiums consist of two components:
- A cost of insurance (COI) amount, which is the minimum premium amount required to keep the policy active.
- A saving component, known as the cash value.
- Minimum Guaranteed Annual Interest Rate: This might be 0% or higher, depending on the insurer.
- Maximum Annual Interest Rate: The rate of return is typically tied to the performance of an index and often capped at around 10-12%.
And since universal life insurance is flexible and has an investment component, there can be fees such as:
- Premium expense charges.
- Administrative expenses.
- Fees and commissions.
- Surrender charge.
Collected premiums in excess of the cost of universal life insurance accumulate within the cash value portion of the policy and increase as the insured ages. However, the accumulated cash value can cover the increases in the COI if there are sufficient funds.
Talking to a professional insurance agent at ABC Dennis Insurance can help you navigate the available options and choose a policy that’s best for your long-term financial goals.
ABC Dennis Insurance Agency
ABC Dennis Insurance is an independent insurance agency established in 1997 that provides life insurance to its customers. If you have not reviewed your insurance coverages this year, please call our office at (813) 949-7765 or email us.
Besides life insurance, we can help with all your insurance needs. As an independent agency, we find the best insurance coverage with the most competitive rates.