What is Universal Life Insurance? Explained – Forbes Advisor INDIA

If you're looking for life insurance with lifetime coverage, a universal life insurance policy might be the right choice for you. With a universal life insurance policy, you can take advantage of the policy's cash value and have the flexibility to adjust your premium payments.

When considering the best universal life insurance, be sure to work with a trusted financial advisor or experienced life insurance agent. They can be complex.

What is universal life insurance?

Universal life insurance is a form of permanent life insurance that allows you to adjust the amount of your premium payments (within certain parameters).

There are a few types of universal life insurance and it's important to understand the differences before purchasing a policy.

How does universal life insurance work?

Universal life insurance policies—also known as adjustable life insurance policies—are characterized by the ability to adjust premium payments, a valuable feature if your cash flow is variable.

Unlike whole life insurance, which lasts until the policyholder dies, universal life insurance policies offer the flexibility to adjust the amount of the death benefit. That means you can lower your death benefit if your need for life insurance decreases over time. You may also be able to increase your death benefit, but you will likely have to go through additional underwriting (questions about your health) to do so.

A universal life insurance policy can remain in effect for the rest of your life (assuming you keep making premium payments).

It typically offers a cash value component. You can withdraw money from the cash value through a cash-out or policy loan. When you cancel a universal life insurance policy, the coverage ends and you receive the cash value less any surrender charges.

Comparison: Types of Universal Life Insurance

Benefits of Universal Life Insurance

• It can be cheaper than life insurance because it does not offer the same guarantees.
• You can vary the amount of premium payments and adjust the amount of the death benefit within certain limits.
• Universal life insurance policies have a cash value component, although some build only minimal cash value.
• As you build up cash value, you can make withdrawals from your cash value or take out a policy loan.

Disadvantages of universal life insurance

• It can be difficult to understand the distinguishing features of the different ULI types.
• Not all universal life insurance policies guarantee a gain on cash value.
• Borrowing and withdrawing the policy will reduce your cash value, and without paying additional premiums, your policy may lapse.
• Variable universal life insurance policies must be actively managed because of the underlying subaccounts.

Guaranteed Universal Life Insurance

A guaranteed universal life insurance policy may be a good choice for someone who is primarily looking for lifetime coverage and is less concerned with the “investment component” of cash value. Unlike other types of universal life insurance, a GUL policy does not offer flexibility in premium payments or death benefit amounts.

• A guaranteed universal life insurance (GUL) policy provides a death benefit and premium payments that do not change over time.
• You generally choose the end date of the policy, which should be above 90 years. If you choose a higher age, the premium will increase.
• A guaranteed universal life insurance policy generally has little cash value and is usually the cheapest type of universal life insurance. You pay for lifetime coverage, not for the potential for significant cash value.
• GUL is sometimes referred to as “universal life insurance without a forfeiture guarantee.” This addresses current problems in which traditional, non-guaranteed universal life policies lapsed because the cash value could not cover the policy's costs and underwriting expenses. Some policyholders who wanted to keep their insurance suddenly found themselves paying much higher premiums that they never expected.
• Newer no-expiration policies promise to stay in force. But there's a catch: If you're late or miss a payment, the policy will likely be canceled. Since the cash value is usually low, there's no money you can withdraw. The insurance company keeps the premiums you paid.

Variable Universal Life Insurance

A variable universal life insurance policy (VUL) allows you to vary premium payments and the amount of the death benefit within certain limits. You generally have to actively manage this type of policy because you select subaccounts for your cash value investments. You may also be able to choose a fixed-rate option for the cash value as part of your investment mix.

With a variable universal life insurance policy, you can potentially earn good returns on your cash value (if you've invested wisely) and exercise some control over your investments.

However, your cash value could also decline if investment decisions hit rock bottom. These policies typically have higher fees than universal life policies and are often more complex.

Who can benefit from variable universal life insurance?

A person who wants to play an active role in selecting the subaccounts for the policy's cash value might be interested in VUL policies. A variable universal life policy would not be a good choice for a person who wants a passive investment or is risk-averse.

Who should consider universal life insurance?

If you value the ability to adjust the amount of your premium payments (within certain limits), consider purchasing universal life insurance.

In addition, life insurance buyers who want to increase cash value by more than a small fixed percentage should consider some forms of universal life insurance. Both indexed and variable universal life policies offer the potential for greater accumulation of cash value if the underlying investments perform well.

Alternative types of life insurance

• ULIP is a unit-linked insurance plan, a long-term investment instrument that offers both the benefits of insurance and the ability to build wealth through investments in equity or bond funds.
• Life insurance is generally the most expensive type of insurance because the policy contains guarantees: premiums are guaranteed not to change and a minimum return is guaranteed on the cash value.
• With term life insurance, you pay a fixed premium for a period of 5, 10, 15, 20, 25 or 30 years. It has no cash value component and you can't adjust the premium payments like you can with universal life insurance. But it is the cheapest way to buy life insurance.