Basics of Universal Life Insurance

In many ways, universal life offers the best features of both term and whole life. Some consumers opt for term life because they can purchase a more appropriate policy when their life insurance needs change down the road. In that case, universal life can offer you that same flexibility by allowing you to vary your death benefit according to your current needs. On the other hand, other life insurance shoppers decide on whole life for the cash accumulation benefits and tax-deferred investment growth. Universal life can actually provide both of these benefits. Read on for more information on the basics of universal life coverage and the pros and cons of such a policy.

Types of Universal Life

Though most universal life policies have a flexible-premium schedule, this is just one of three varieties of this type of coverage. Each of the three forms of universal life is explained below.

1. Single premium. The policyholder pays for the cost of coverage up front, making just one large payment when the policy is created. The coverage then remains in force until the cost of insurance (COI) charges deplete the policy’s account.
2. Fixed premium. The policyholder makes regular payments for the coverage, usually over a limited period of time (e.g., ten years). After the scheduled payments are complete, the policy is considered paid in full and will remain in force despite the cessation of payments. This structure of periodic premium payments is similar to that of a health insurance policy.
3. Flexible premium. This is the most popular form of universal life. In this schedule, the policyholder decides how much he/she wants to pay when the premiums are due. Some companies also offer flexible premium universal life with a significant up-front deposit, after which policyholders make payments sporadically.

Advantages of Universal Life

The most appealing feature for most people is the flexibility. Not only can you change your death benefit as your coverage needs vary, but you can also choose the level of premiums you want to pay. The flexibility in the premium payments schedule allows you to select your premiums to accommodate your present financial circumstances.

Drawbacks of Universal Life

Policyholders can’t make minimal payments on a universal life policy for an extended period of time and still expect to have life insurance coverage. Inadequate payments could leave the insured without protection eventually. Likewise, there are no guarantees with universal life’s cash value accumulation. If the insurer’s investments do poorly, so does your policy. As the cash value of your policy drops, the premiums requisite to maintain coverage will increase.