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What is universal life insurance?
Universal life insurance is a form of permanent life insurance that has a primary benefit of using the policy’s cash value to pay for premiums. The value accrues and earns interest as you pay monthly premiums, lending the opportunity to also act as a savings account. With universal life insurance, the interest rate earned on the cash value is subject to change, as compared to whole life insurance where the interest rate is fixed.
The Basics of Universal Life Insurance
Universal life insurance is designed to last for your entire life, so when you purchase a policy, you’re covered as long as the premiums are paid. Much like a whole life insurance policy, a portion of your universal monthly premium will go toward a cash value. For this particular type of life insurance policy, the cash value can earn a variable interest that can eventually be used to pay for some of your monthly premium. The variable interest rate, however, builds a much smaller gain that you might expect.
Types of Universal Life Insurance
There are two main types of universal life insurance: indexed universal life insurance and guaranteed universal life insurance.
Indexed insurance has many of the characteristics of a standard universal policy, with the exception of the cash values growth. The cash value of an indexed universal life insurance policy is tied to the performance of a specific index and each insurance provider typically has its own selection of indices available. An indexed universal policy has the potential of high returns, but can also be riskier.
Guaranteed universal life insurance policy is different in the sense that it won’t lapse if the cash value is zero. Guaranteed universal typically has one of the lowest price tags for permanent coverage given the no or low cash value component.
Cost of Universal Life Insurance
While the cost of universal life insurance tends to be less expensive than whole life insurance, it is still more expensive than term life insurance. The intention behind universal insurance was that the cash value would accumulate interest at a rate tied to market indexes, but as interest rates go down, premiums go up. You have the opportunity to use the cash value toward your premiums with universal life insurance, but this then reduces the amount of the death benefit.
Benefits of Universal Life Insurance
Some of the main key advantages of universal life insurance include:
Potential Return of Premium – Some universal life insurance policies offer a return of premium option, meaning if your needs change and you have to cancel your policy, you’ll get some of your money back.
Cash Value – As your universal life insurance premiums accrue, and at a time specified by the insurance company, you can borrow against your policy’s cash value.
Lifetime Coverage – Universal life insurance provides coverage for a lifetime.
Who Should Buy Universal Life Insurance
A universal life insurance policy is typically for individuals with very specific needs. This could include someone with a high net worth wanting to take advantage of a tax-deferred savings component or potentially parents of a child with special needs due to the high costs associated with caring for their child. At SelectQuote, we can help you weigh out your life insurance options and determine what kind of life insurance policy would be the right fit for you.
Frequently Asked Questions (FAQs) about Universal Life Insurance
Is universal life insurance a good investment?
If you’re looking for permanent coverage, universal life insurance can be a smart investment as it’s typically less expensive than whole life insurance but has similar benefits.
What happens when a universal life insurance policy expires?
A universal life insurance policy is a form of permanent life insurance, meaning it should provide coverage for your entire life as long as the premiums are paid.
Which is better: term life insurance or universal life insurance?
Term life insurance is typically the most common and most affordable form of life insurance, with the ability to meet the needs of many. While universal life insurance is more expensive, it does provide permanent coverage so long as your premiums are paid. Whether one is better than the other will differ from person-to-person, but we can help you compare the two if you think one or both might be the right fit for you.
Find the best life insurance for you with SelectQuote.
Understanding the complexities of the different types of life insurance can be overwhelming, but we can help. We’ll learn more about your needs and help you decide what kind of life insurance policy is the right fit for you. Then, in just minutes, we’ll provide unbiased quotes from the trusted insurance companies we partner with to find the right coverage for you.