Universal Life

Life Insurance Comparison Chart There are a few different types of universal policies and they are all largely different from one another. There are benefits and drawbacks to each which we will talk about below.

Policy Length

Universal life (UL) policies last for the insured’s lifetime or until the maturity date so long as premiums are paid.

The maturity date of a permanent policy is when the cash value (we’ll get into that below) equals the death benefit. The maturity date is set when the policy is issued. Policies issued prior to 2009 can have a maturity date as early as insured’s age 90. Policies issued after 2009 are usually set to mature at insured’s age 100 or 121. How maturity is handled will differ between insurance companies. Some companies will force surrender of the policy at maturity and pay out the cash value. In other cases, the maturity date may be extended and the cash value will not pay out until the death of the insured.

Cash Value

Universal policies have a cash value feature similar to whole life policies. A portion of the premium is still put towards the cash value. The cash value can be utilized to pay premiums. However, UL policies accrue interest in 2 different ways:

Fixed Universal Life (UL). Fixed UL policies accrue interest based on a fixed interest rate, similarly to whole life policies. This allows for guaranteed growth and is the least risky of the universal policies.

Indexed Universal Life (IUL). IUL policies accrue cash value at a variable rate. The rate is tied to the performance of an underlying index account such as the S&P 500 and Nasdaq 100, selected by the insurance company. The insurance company will set a minimum interest rate and a cap interest rate. While the cap rate may limit the policy’s ability to accrue interest when the market does well, the minimum rate will protect the cash value from loss. This is the most balanced universal policy.

Variable Universal Life (VUL). VUL policy cash value is directly invested in the market as the policyholder chooses. Accrual of interest depends entirely on the performance of the selected investments. Therefore, there is no protection against the cash value or guarantee of growth. VUL policies are the riskiest universal policies.

Premiums

Universal policies boast flexible premiums (to an extent). Universal policies require a minimum premium so that the policy can remain in-force. Additional premium can be paid to increase cash value. As mentioned above, once the cash value has accumulated enough, it can be utilized to pay the premiums allowing the policyholder to reduce or stop paying premiums entirely. In this case, it is important for policyholders to be aware of their cash value and premiums even if they are not paying anything out-of-pocket. If the cash value is in danger of not being able to cover the premiums, policyholders will be instructed to pay additional premium so that the policy doesn’t lapse.

Death Benefit

Another flexible feature of universal policies is the death benefit. The death benefit can be adjusted to be decreased or increased without applying for a new policy. In the event of a requested increase, the insured may need to undergo additional underwriting to reassess their health.

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