Universal life insurance is a permanent life policy. As long as you pay the premium, permanent life policies remain active. People like universal life because it’s less expensive than whole life and still has a tax-deferred saving component. Universal life also has flexible premiums. You can change the premiums and death benefit within certain limits.
An online service like Policygenius can help you make sense of the different life insurance options available to you. The application is simple, and Policygenius sends estimates from top carriers for whole and term life insurance in just minutes.
How Universal Life Insurance Works
Universal life typically requires minimum payments at first. Part of these payments go toward the cash value. You can use the cash value to pay your premium, take out a loan against when you need money for a major purchase, or withdraw it. You may even be able to pay off your policy in full.
Keep in mind that your cash value is a “living benefit.” If you do not use it before you die, it goes back to the insurer. Your beneficiaries don’t get any of it.
You can change the death benefit in universal life insurance. This lets you fit your policy to your changing financial needs while maintaining a permanent policy. For instance, you may want a higher benefit when your children are young. Once they’re adults, they won’t need as much assistance after your death.
Changing your death benefits may make sense in some situations, but it does have some drawbacks. Reducing it usually lowers your premium, but it means your beneficiaries get less support. Conversely, your rates go up when you increase the death benefit, plus you’ll need to a medical exam.
The other portion of your premium goes to the cost of insurance. That’s the amount the insurer charges to keep the policy active and pay the death benefit. However, your universal life premium is set up to be more than the cost of insurance, so the extra is funneled to the cash value.
Who Needs Universal Life Insurance?
Flexibility makes universal life ideal for people who want permanent insurance but anticipate their situations fluctuating. The premium you pay over the cost of insurance earns interest in the cash value that you can use to reduce or even skip payments. Plus, you can adjust the death benefit to reduce your overall premium.
This flexibility means universal life insurance might make sense when:
- You’re in your 30s or younger: The cash value in universal life insurance takes 10 to 15 years to accumulate significant interest; buying it when you are age 30 or younger gives you a better chance at saving enough to make the extra cost of universal life pay off
- You have a large estate: Estates with combined gross assets and prior taxable gifts exceeding $11.4 million in 2019 are required to file federal estate tax returns; if that describes your estate, your beneficiaries can use the death benefit to pay it
- You are planning your retirement: If you’re able to put enough in your cash value, you may end up having no premium later in life; however, your cash value is tied to your insurer’s portfolio. Its performance influences how much you end up with
- You have a special needs child: Creating a special needs trust and naming it as the beneficiary can give your child the lifelong support they need
Universal life insurance may be right in these situations, but it does require some thought, according to Mark Peterson, AIG’s executive vice president and chief distribution officer:
“Universal life insurance offers the advantage of flexibility, but with that flexibility comes some additional obligations. Policy owners must engage in what we call ‘active management,’ meaning they must regularly revisit their policy so they can use the product in a way that meets their particular needs. AIG recommends universal life policy owners meet with their agent or financial advisor annually to review current financial needs and evaluate the impact of any policy-related actions taken by the policy owner and of changes in interest rates.”
Universal Life Insurance Providers
The best universal life insurance providers are large and established companies with a strong financial background. They have a variety of options to choose from and can customize a policy to suit your needs.
Top Universal Life Insurance Providers
|Mutual of Omaha|
You need to weigh a couple of factors when picking a provider. First, look for companies that offer multiple products. That way you can find universal life insurance that fits your goals and budget. Additionally, check the company’s financials. You want to be sure your dependents will see benefits and that your cash value will grow.
Here are five of the best universal life insurance companies available.
1. Pacific Life
Universal life insurance is the cornerstone of Pacific Life’s product line. It’s ranked consistently among the top universal life providers for wealth building, partly because of its indexed policies’ performance. Depending on your location, Pacific Life markets at least four standard universal life policies, plus several variable and indexed policies.
People looking to accumulate wealth for retirement would be smart to look at Pacific Life universal life options. The risk may be greater in these products, but the potential return is substantially higher than in other life insurance policies.
2. Prudential Financial
Like most of the companies on our list, Prudential Financial is a large, financially sound insurer. Unlike the others, it only offers two types of life insurance: term and universal. Its lineup of 11 universal life products includes a variety of standard, variable, and indexed policies.
People age 60 and older and in less-than-perfect health can usually find universal life insurance through Prudential Financial. The company has lenient underwriting standards and often offers coverage to people with histories of diabetes, high cholesterol, and heart attacks.
3. State Farm
State Farm consistently ranks high on top insurers lists, mostly because of its exceptional customer service. You can reach a State Farm customer service representative any time, day or night. Additionally, State Farm offers a standard universal life insurance policy and two other policies to cover additional people.
This is the company you are young and in excellent health. Its strict underwriting rules mean people with poor health records often get declined. The guidelines are so strict people have been turned away for moderately high cholesterol and bad driving habits.
4. Mutual of Omaha
Mutual of Omaha is also a well-known and financially stable option. The company offers four universal life policies with optional riders, like one that accelerates death benefits if you’re diagnosed with a terminal disease.
Mutual of Omaha’s lenient underwriting guidelines makes it the best option for people who take risks. This can mean thrill seekers, like someone who jumps out of planes for fun. But, Mutual of Omaha also provides coverage for individuals in high-risk jobs, like construction workers or police officers.
5. Protective Life Insurance
Protective Life may be the least recognizable name on our list, but it’s here for good reason. The company has a couple of universal life options, including Custom Choice UL. It starts with low premiums for a set coverage period, then switches to permanent life at expiration. The coverage amount goes down while premiums stay level.
Protective Life is known for low-cost life insurance. Its site advertises a 10-year, $100,000 policy for a healthy male at just $7.17 per month. This plus the flexibility of Custom Choice UL make Protective Life an ideal choice for young people who want term coverage now but anticipate life change that may require different insurance.
Universal Life Insurance Costs
A 20-year-old’s annual premium for $250,000 in coverage averages between $600 and $1,200. A similar policy might cost a 50-year-old person between $2,400 and $5,400 a year.
Typical Annual Guaranteed Universal Life Insurance Rates By Insured Age and Coverage Amount
Your universal life insurance premium depends on a number of factors, including age, health, and sex. Apply those factors to your providers’ underwriting rules and rates can vary greatly.
Remember, universal life insurance premiums are flexible. Not only can you skip payments when finances are tight, but you can also overpay and have the extra go to your cash value. However, you also have to pay attention to the cost of insurance, which can go up with age and increase your minimum premium.
Types of Universal Life Insurance
All universal life insurance has three key features. First, they are permanent. Policies last as long premiums are paid. Second, they pay a death benefit to your beneficiaries. Finally, they have a cash value component that let the policyholder build equity over time.
This article mainly deals with traditional universal life insurance. However, insurers have developed additional products to fit a wider variety of financial situations. In most cases, they made adjustments in the cash value portion, as in the examples below.
Indexed Universal Life Insurance
Indexed universal life insurance splits its cash value between a fixed account and an equity index account, like the S&P 500. You get to choose how much of your premium’s cash value portion goes into either. These policies usually have a maximum return but a guaranteed interest rate.
Indexed universal life insurance is right for people who want to use life insurance as part of their investment strategy. You get to decide how much risk your willing to put into the index, and the guaranteed interest rate reduces your risk even further.
Variable Universal Life Insurance
Variable universal life insurance has a tax-deferred cash value that’s made up of sub-accounts. These sub-accounts are usually stocks, bonds, and money market accounts. Your premium goes into the sub-accounts, and your insurer takes out what it needs to manage your policy. Your cash value fluctuates with the rise and fall of the market.
The growth of variable universal life insurance is tax-deferred, and the death benefit is not taxed when paid to beneficiaries. It also has greater growth potential than traditional universal life. However, that potential comes with more risk. Your overall cash value can be depleted when the market swings out of your favor, leaving you with higher premiums. This makes it right for people who have an understanding of the market and time to pay attention to its movements.
Group Universal Life Insurance
Group universal life insurance sounds like what it is: a universal life insurance program designed for multiple people. Group members pay premiums and can opt to add to the cash value. The cash value typically earns a fixed interest rate. As it grows, contributors can withdrawal from or take loans on the cash value.
Business owners often offer group life insurance to their employees. It is usually easy to qualify for group life, and it’s less expensive because more people buy in.
Pros & Cons of the Universal Life Insurance
With universal life insurance, the features that are often pluses can be detractions when you dig into the nitty-gritty. One good example is adjustable death benefits. That’s an attraction for people who see their insurance needs changing. However, it’s also one of the reasons the policy is so complex. This list of pros and cons gives you an idea of what we mean.
Pros of the Universal Life Insurance
Some reasons to get universal life insurance are:
- Permanent coverage: A permanent policy like universal life lets you provide for your dependents no matter when you die; that peace of mind can be invaluable in some situations
- Flexibility: While permanent coverage is a plus, most people’s insurance change over time; universal life insurance lets you change both your premiums and death benefit
- Access to cash value: You can get money when you need it through your policy’s cash value either by withdrawal or loans; moreover, you don’t have to qualify or repay the loan
- Earning potential: Your cash value earns interest based on the market; when the market is strong, your cash value can build up quickly; other policies, like whole life, set a fixed interest rate so that the earning potential isn’t as strong
Cons of Universal Life Insurance
The drawbacks of universal life insurance include:
- Cost: Compared to term life insurance, universal life premiums are expensive; plus your minimum premium only covers the cost of the policy; you have to pay more than that to see your cash value grow
- Cash value exhaustion: Using your cash value can deplete it to the point where it can’t cover your premium; then, you’re stuck either paying the premium or letting the policy lapse
- Interest on cash value loan: When you take out a loan on your cash value, you’re borrowing your insurer’s money; your insurer will charge interest; failure to pay also depletes your cash value and may ultimately result in the policy lapsing
- Risk for premium increases: Even though universal life usually has a guaranteed minimum insurance rate, your insurer may raise the cost of your coverage when its portfolio underperforms
- Complexity: The flexibility and cash value make universal life insurance difficult to understand; if you buy this policy, you may have to keep a closer eye on it than if you purchased whole or term life insurance
Alternatives to Universal Life Insurance
Universal life insurance may not be the right coverage for you. Depending on your financial situation, you may want to look at other products.
Here are two alternatives to universal life insurance.
Universal Life Insurance vs. Whole Life Insurance
Like universal life insurance, whole life is a permanent life insurance policy with a tax-deferred cash value. However, whole life has level, or fixed, premiums and a guaranteed death benefit. Because of these features, whole life insurance usually costs more than universal life insurance.
Whole life is right for many of the same people universal life is right for young people, high net-worth individuals, and parents. The major difference is universal life gives you the ability to adjust your coverage to fit your changing needs.
Universal Life Insurance vs. Term Life Insurance
Term life insurance is straight insurance. You pay a premium and, in return, your insurer pays your beneficiaries a set amount upon your death. It doesn’t have a savings option, like permanent life insurance has, and it ends on a set date. Your beneficiaries only receive a payment if you die during the policy term.
Premiums for term life are usually significantly less expensive than those for universal life. That’s one reason young people with fewer cash reserves may be more like to buy it. Term life is also a good choice for anyone who’s looking to replace their income or cover expenses for dependents after their death.
Frequently Asked Questions (FAQs)
Universal life is a complicated insurance policy, mainly because of the investment potential in the cash value. We have answers to some of the most commonly asked questions below. If you don’t see your specific question, post it in our forum to get it answered.
What Happens When Universal Life Insurance Matures?
Insurers design policies to mature at some distant date, sometimes as far off as your 121st birthday. If you live to the maturity date, your insurer pays out the cash value and the policy ends. If you have used most of your cash value to pay premiums, then you end up with no coverage and little payout.
Can You Cash in a Universal Life Insurance Policy?
You can cash in your policy, but there are some strings attached. First, universal life insurance policies usually have a surrender period of about a year. You may be able to make a withdrawal during the surrender period, but you’ll pay a penalty of up to 10 percent. Additionally, withdrawals are taxable.
What Happens to the Cash Value When I Die?
Your insurance company keeps the cash value and pays only the death benefit to your beneficiaries. Moreover, the death benefit is reduced by any outstanding loans taken against the cash value.
The Bottom Line
Flexible premiums and death benefits make universal life an attractive policy for anyone interested in permanent life insurance. However, those features add layers of complexity that make picking the right version for your situation difficult. Before you purchase a policy, you should read it thoroughly.
One way to find the right life insurance policy is to go online to a site like Policygenius. You can use Policygenius to get quotes from up to seven providers and get approved in minutes.