What Is a Universal Life Insurance Plan?

Why Universal Life Insurance Coverage May Be a Good Option

There are multiple scenarios where the flexibility of universal life coverage can be more appealing than the fixed premiums in a whole life product. Examples might include: 

• Needing a policy that allows flexible payments. All products have minimum contribution thresholds that must be maintained, but universal life can offer flexible payments as long as minimum payments are met. 
• Wanting a more accessible financial entry-point into life insurance. Depending on your circumstances, whole life coverage can be more expensive than universal life coverage, and may be outside of your budget.   
• Anticipating a higher income in the future. When you apply for whole life coverage, the cash value growth potential is defined. Those who expect to earn more later on can decide whether to make larger deposits within a universal life plan, but whole life values are fixed. 

When you make a payment into your universal life policy that is above the minimum required payment, the insurance provider will deduct any administrative charges linked to the cost of the coverage and deposit the balance into your policy’s cash value. 

Over time, that cash value can grow and earn interest, which you may be able to take out a loan or withdrawal from if you encounter unexpected expenses.  

What Are the Potential Drawbacks of Universal Life Insurance Plans?

The primary issue associated with the flexibility of universal life coverage is that the policy must be adequately funded to remain valid, so there are always minimum payments that need to be met. Underfunded policies may lapse, or the policy holder may need to pay a substantial amount to make sure the policy stays in force.

Likewise, the cash value is not guaranteed, and it is worth comparing the interest rates offered to ensure a particular product meets your financial needs. Choosing a product with a competitive minimum interest rate may be a good option.

How Does a Universal Life Coverage Death Benefit Work?

Most universal life insurance products allow you to adjust your premium payments, as long as minimum premiums are met.  

You can select universal life insurance coverage that offers a level death benefit, whereby the death benefit is fixed for the duration of the policy, and any additional funds are channeled into your policy’s cash value. However, this type of policy does not increase the overall death benefit. If the cash value hasn’t been accessed at the policy holder’s death, or hasn’t been used to help pay premiums, any remaining cash value would revert to the insurance company. 

An alternative is to have an increasing death benefit (although not every company offers an increasing death benefit). In this case, any accumulated cash value is added to the amount payable to your beneficiaries, provided no loans or withdrawals have been made against the cash value. This product feature often commands higher premiums than a level death benefit. 

You may also apply for increased coverage at a later date. However, this may require a medical exam. Most insurance companies also require policyholders to have maintained their policy for a minimum period before they can make changes to their policy.