There are different types of life insurance. Term life insurance is a simple contract. Pay your premiums each month for a specified term and your family will get a death benefit when you pass away. Whole life insurance provides a death benefit too, but the policy doesn’t expire. Universal life insurance is similar to whole life insurance. This type of life insurance doesn’t expire, which makes it “permanent insurance.”
Permanence isn’t the only reason people buy universal life insurance. Whole life insurance is permanent, but the rates tend to be higher, and there’s no flexibility in the price of premiums or how you can invest the cash value. Universal life offers both. Those and other advantages you might not be aware of are outlined below. Here’s why people buy universal life:
Universal life insurance has a cash value.
Universal life insurance builds cash value every time you make a monthly premium payment. That cash value is also the “surrender value” of the policy if you choose to cancel it, and it can be used as collateral if you’re looking to take out a loan.
Premiums and death benefits are flexible.
Universal life insurance contracts are generally structured with more flexibility than other types of life insurance. They often allow the insured to change how much they pay in premiums and adjust the death benefit if they want to. These adjustments will also affect the policy’s cash value but can help the policyholder navigate challenging financial circumstances.
Variable policies offer investment options.
Variable universal life (VUL) insurance policies offer another level of flexibility that’s unavailable with guaranteed universal life (GUL) insurance. Policyholders can choose to invest their cash value in stocks and bonds. You can also buy indexed universal life insurance (IUL) that invests the cash value in index funds that track the S&P 500 or Nasdaq.
Distributions and death benefits are tax-free.
Life insurance premiums are paid with after-tax dollars, so distributions and death benefits are tax-free. This can be particularly useful with universal life insurance because policyholders can withdraw cash without cashing out the policy. There are also no penalties for withdrawing funds, unlike withdrawals from retirement funds which could be costly.
The policy can pay premiums.
You can use the cash value of a universal life insurance policy to pay monthly premiums. This should only be done when necessary because it depletes the policy’s value and could lower the death benefit or surrender/maturity payout. It’s better to pay extra early in the life of the policy to build cash value and then use this feature to pay premiums when you’re retired.
The bottom line
Life insurance companies typically target advertising for universal life insurance for high-net-worth individuals. That doesn’t make it exclusive to them. The flexibility in premiums and the ability to invest the policy’s cash value make universal life a good fit for anyone, regardless of income or asset level. Speak to your local registered insurance agent to learn more.
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