What Is Universal Life Insurance?

Written by Jeff Root

Universal life insurance is a type of permanent life insurance coverage. Universal life insurance comes in many different forms.

Like all types of permanent life insurance, universal life insurance is designed to last for your entire life and when you die your beneficiaries receive a tax-free death benefit. It also accumulates cash value over time from the premiums that you have paid into the policy. This cash value can be borrowed against on a tax-free basis, and some policies can even become part of your death benefit when you pass away.

The main differentiating factor between the various types of universal life insurance policies is the way that they are paid up, and the way the cash value accumulation works.

Based on your situation, universal life insurance may be best for you. Depending on the type of life insurance coverage and the type of cash value accumulation you are looking for, any number of these policies may be the best choice for you.

Let’s take a second to outline the topics we will cover in this article:

What you will learn in this article (click to go to section):

Frequently Asked Questions About Universal Life Insurance

Before we dive into everything you will need to know about universal life insurance, it is important to answer a few questions we get all the time regarding universal life policies.

How does a universal life policy work?

A universal life insurance policy gives you protection with a guaranteed death benefit. In addition to this guaranteed death benefit, the money taken from part of your premiums is invested and that means you have the option of making cash value over time. This cash value grows on a tax-deferred basis.

With that cash value, you can apply it toward the premiums you owe so that perhaps one year you never have to pay out of pocket because the cash value accumulated is substantial enough to cover your premiums. Additionally, you can withdraw all that cash value and use it for whatever purpose you see fit while you are still alive without taking away from the death benefit you have.

What happens when a universal life insurance policy matures?

Some companies will force you to surrender your policy when it matures and then they give you a cash value payout. With a universal life insurance policies, the cash value will typically not be as high as your original death benefit.

Is there a difference between universal life and whole life insurance?

One of the biggest differences is the flexibility as mentioned. With a universal life insurance policy, you have much more flexibility in terms of the death benefit, the premiums, and your potential for growth. If you don’t foresee changes to your financial circumstances and you won’t need to alter how much coverage you have with your death benefit and you don’t care about gaining cash value, then obviously the whole life insurance policy is less of a risk.

The Different Types

Guaranteed universal life

Guaranteed universal life insurance is a form of permanent coverage that offers a guaranteed death benefit. The death benefit that you get is not impacted by the cash value of the policy, unlike other plans. You can choose a flexible death benefit amount of time and typically speaking you can only take out this plan as long as you are under the age of 100 or 120 depending on the company. The premium is going to be lower for those who are younger.

Indexed universal life

Indexed universal life insurance is also known as fixed indexed universal life insurance. It is a permanent plan that builds tax-deferred cash value. The cash value that is gained is based upon the performance of a specific market index. Your policy is tied to a guaranteed minimum which protects you against substantial market loss. Most of the time you come out with a zero cash value at worse. Premium payments and the death benefit are flexible. You can adjust them so that you pay different amounts at different times based on your financial situation.

Variable universal life

Variable universal life insurance is a flexible product that offers permanent coverage and gives you a higher chance or tax-deferred cash value by way of different investment options. You can choose the investment tool you use so you take on the responsibility for the market gains and potential losses that you would face with this policy. The cash value you are able to earn will fluctuate contingent upon the investment option. There are different caps afford this policy based on the company that you choose and each cap is designed to provide you with different levels of risk and potential gains.

Single premium universal life

If you have the ability to pay a single lump sum for your life insurance policy you can take out a single premium life insurance policy that is a universal life insurance option. This product comes in any of the forms mentioned above but the key difference is that instead of paying on a regular basis you simply pay once at the very beginning and then you never have to pay a premium again.

Survivorship universal life

Survivorship universal life insurance products are the same as the products listed above but the difference is you can cover two people, typically a husband and a wife but it could be two business partners. Then the death benefit payout takes place when the surviving spouse or surviving partner files the claim after the death of the first.

Universal Life Insurance vs. Whole Life Insurance

Whole life insurance policies and universal life insurance policies are considered “permanent” policies, as opposed to term policies which are temporary. This means they last for your entire life and won’t expire so long as you pay your premiums on time. They can both gain cash value which you can borrow against without any tax complications and for that reason they are both going to have higher premiums compared to term.

What is the difference between whole life insurance and universal life insurance?

The main difference is that a universal life insurance policy has more flexibility. Universal life insurance policy premiums typically cost less during the same amount of time and at the same age compared to a whole life insurance premium for the exact same death benefit.

A key difference between whole life insurance and universal life insurance is how your interest is paid. The interest paid for a universal life insurance policy is adjusted on a monthly basis whereas the interest you pay for a whole life insurance policy is adjusted on an annual basis. So people can budget better with a whole life insurance policy whereas those who take out a universal life insurance policy are going to see fluctuation on a regular basis.  

As a result, this could mean that if there is a rising interest rate or a long amount of time the universal policyholders will see cash value increase rapidly whereas the interest for a whole policy increases rather slowly by comparison.

Benefits of Universal Life Insurance

Universal life insurance can provide you with many benefits such as the ability to change your death benefits with time and accumulate cash value. In some cases, you might be able to skip the premium you pay because your cash value accumulation is adequate enough to cover any required expenses that month or that year. Certain policies allow you to increase or decrease death benefit amounts based on your circumstances.

You might, for example, no longer need coverage for an inheritance, for a mortgage, or for income replacement in which case you can reduce the coverage you have for your death benefit and reduce the premiums by extension. You can also borrow against that cash value and any interest earned is tax-deferred.

The benefits of this guaranteed universal life insurance plan include a guaranteed death benefit, fixed premiums, and a lower cost compared to whole life insurance.

The benefits of an indexed universal life insurance policy include the fact that every year you gain cash value which then gets locked into place. You also get protection against market loss.

The benefits associated with a variable universal life insurance policy include greater tax-deferred accumulation for cash value, better flexibility, and the ability to combine different investment choices with your life insurance policy.

Benefits of Whole Life Insurance

Whole life insurance comes with level premiums, so the amount you pay will remain the same. These policies also have the protection that means you will never outlive the policy; it will be there whenever you pass away as long as you pay premiums on time. Moreover, it has the ability to gain cash value that you get to use while you are still living.

Whole life insurance has the ability to increase the value of the account and you can take out loans against your policy. It also makes it a lot easier to budget when your premium payments are the same amount every month.

For those individuals who are already heavy investors and are really looking to capitalize upon an additional tool for investing, a universal life insurance policy is going to be the best option.

A universal life insurance policy is going to be most appropriate for people who want permanent coverage but they also want a secondary method of gaining value on their money especially in a tax-deferred bracket. There are so few tools out there that offer tax-deferred cash value in any investment opportunity that people who already have a diverse portfolio are going to truly appreciate the advantages that they can find in a policy like this.

Not everyone understands or appreciates the true potential value you would get. Of course, there is typically a cap not only on the minimum level to mitigate your risk of losses but a cap on the maximum level so you certainly won’t be able to make as much money as you would simply using the stock market but you do have the added protection against serious losses.

When to Pick Whole Life Insurance

It is best to pick a whole life insurance policy if you are simply looking for a type of permanent coverage but you don’t want to be the one in charge of your investment vehicle. Not everyone is knowledgeable about different investment funds or indexes and not everyone wants to be responsible for managing a portfolio.

People who want to have the potential in place for gaining minimum cash value without having to put in a lot of effort or really research to understand the stock market is going to benefit the most from a whole life insurance policy. This is also best suited for individual and need to be able to budget accordingly or monthly payments but also need permanent coverage.  This type of permanent coverage means that you can literally budget for the rest of your life.

How Much Does Universal Life Insurance Cost?

The amount of money you pay for a universal life insurance policy is going to be contingent upon the type of policy out of the options listed above, your age when you sign up for the policy, your gender, and of course the medical review conducted by the companies.

The best way to compare all of your universal life insurance options is to speak with an independent life insurance agent who represents multiple companies. This will help you understand all of the universal life insurance policies out there to see which one is the best for you, as well as weigh your other policy options.

Finding the best universal life insurance rates should be easy. Speaking with an agent is the quickest way to ensure that you have done your research to protect your family. Give us a call today to compare policies, rates, and companies. Or get started online using our life insurance quoting tool.

Top 5 Best Universal Life Insurance Companies 

There are multiple companies that offer attractive universal life insurance policies. Here is our list of the top 5 best universal life insurance companies:

Company A.M.Best Customer Reviews
AIG A 4.1 / 5
American National A 4.2 / 5
Banner Life A+ 4.3 / 5
John Hancock A+ 4.1 / 5
Mutual of Omaha A+ 4.0 / 5

AIG (American General)

AIG offers great guaranteed universal life insurance policies where you can choose to surrender the policy in exchange for 50% return of your premiums at the 20-year mark If your circumstances have changed. You can also change the death benefit amount with time in order to reduce the premiums.

American National

American National offers a very attractive indexed universal life insurance policy that is tied to the S&P 500. You can enjoy a guaranteed minimum cap of 3% which is great for almost any age bracket.

Banner Life 

Banner life insurance has a special universal life insurance policy called life step which is another option to consider. This policy offers great flexibility and customers can choose the number of years they want to make their premium payments.

So, you can choose to only make premium payments while you are still working and have income being generated or you can choose to stretch the amount of time you pay so that you are continuing to cover your premium costs well into retirement. The choice is yours.

John Hancock

John Hancock is a great company for protection survivorship indexed universal life insurance and variable life insurance policies. It is available for anyone up to the age of 90 and it has a minimum cap of 0% so you never get a negative return.

Mutual of Omaha

Mutual of Omaha has a guaranteed universal life insurance plan with a guaranteed minimum interest rate of 2%.

The policy allows you to change your premium payments on a regular basis so that if you perhaps have extra income one month because of a bonus you can pay most if not all of your annual premium rather than having to pay on a monthly basis.

You also get the option of adjusting your death benefit as your needs change with time. This is an excellent choice for anyone who wants the tax-deferred cash value growth and the ability to withdraw cash from the account.

Finding the Best Universal Life Insurance Policy for You 

When it comes to finding the best life universal life insurance policy, you want to be sure that you are comparing all of your options.

The best way to do this is to speak with a professional. Our independent life insurance agents represent some of the best universal life insurance companies on the market in order to help you understand and compare your policy options with ease.

Give us a call today to start working with an independent life insurance agent who can help you find the best coverage options for your situation. Or get started online by comparing life insurance rates with our online life insurance quoting tool.

Compare the Best Universal Life Insurance Companies

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About Best Life Insurance Companies

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