Universal Life Insurance: The Permanent Policy With Premium Flexibility
Universal life insurance provides permanent coverage with flexible premiums and adjustable death benefits. Here is how it works, what the risks are, and when it makes sense.
Universal life insurance (UL) is a type of permanent life insurance that offers more flexibility than whole life. You can adjust your premiums and death benefit within limits. That flexibility is valuable — but it also introduces risks that whole life does not have.
How Universal Life Works
Universal life insurance separates the insurance and savings components. Your premium goes into a cash value account. Each month, the cost of insurance is deducted from the cash value. The remaining cash value earns interest at a declared rate (typically tied to current interest rates, with a guaranteed minimum).
The Premium Flexibility
You can pay more than the minimum premium to build cash value, or less (down to the minimum required to keep the policy in force). This flexibility is valuable during lean years. However, paying too little for too long can cause the policy to lapse.
The Interest Rate Risk
Traditional universal life insurance is sensitive to interest rates. Policies issued in the 1980s when interest rates were high often underperformed when rates fell. If the declared interest rate falls below the illustrated rate, the policy may require higher premiums to stay in force.
Guaranteed Universal Life
Guaranteed universal life (GUL) is a type of UL that guarantees the death benefit regardless of interest rates, as long as you pay the required premium. GUL is essentially permanent term insurance — it provides a guaranteed death benefit at a lower cost than whole life, without the cash value growth.
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