Understanding Universal Life Insurance
Flexible, permanent protection for life.
How Universal Life Insurance Works
Premiums for a universal life policy are paid into your policy's account, where they can earn interest. You select the amount of insurance ("selected amount") and periodic premium ("planned premium") that you'll be billed. Every month, various deductions—like a charge for insurance protection and other policy & rider charges—are deducted from the policy. What remains—plus any interest credited—is the policy's account value.
The Flexibility of Universal Life Insurance
The key feature of a universal life insurance policy is flexibility. This flexibility is provided in three ways:
The premium you pay
Universal life insurance gives you flexibility—premiums are discretionary as long as the policy has a positive cash value. This gives you freedom to change premium payment amounts as your life changes. For example, if you're just starting out with life insurance, universal life allows you to make lower payments with a more limited income. As your income grows, time passes, and more discretionary income becomes available, universal life allows you to make additional payments or increase payment amounts, which can produce greater cash value.
The death benefit you choose
Universal life's adjustable death benefit also provides flexibility. As you go through the different stages of life, responsibilities change—causing coverage needs to change. The death benefit in universal life may be increased to provide additional protection as your family grows, if you buy a new home, or business opportunities present themselves. (But proof of insurability is required to increase your death benefit). The death benefit could also be decreased as children leave home, a mortgage is paid off or other events occur.
The value of the policy
If you choose universal life, you may want to focus on using the flexible premium option to pay more than the amount of the monthly policy charges so the policy grows—this is particularly true as you receive additional income.
Universal life can give you a chance to grow your policy's value substantially by paying as much premium as you'd like into the policy, subject to guideline premium limitations. Your policy (if sufficient) can then be used to help pay for college expenses, to get a leg up on retirement planning, or saved in case of emergency.1 You must also keep sufficient cash value in your universal life policy to ensure its no-lapse guarantee and extended coverage benefits remain in force.
The Tax Advantages of Universal Life Insurance
Life insurance products like universal life provide significant tax advantages over other products. Withdrawals up to the amount of premiums paid are not subject to income taxation under income tax law.1 Also, unlike annuities, cash value withdrawn from your policy (so long as it is not a MEC) is not subject to IRS pre-59 ½ withdrawal penalties. Finally, the death benefit from a life insurance policy passes income tax-free to your beneficiaries.