Universal Life Policies
Universal Life (UL), also known as Flexible Premium or Adjustable Life Insurance, is a type of non-guaranteed Permanent Life insurance that trades the certainty of guaranteed lifetime coverage for flexibility and potential for credited interest accumulation in cash value. UL policies come in two forms of interest accumulation:
-
Indexed: Credited interest is linked to the performance of selected market Indexes (like the S&P 500), potentially allowing for higher interest while protecting against negative index performance years through a 0% interest floor. Due to the complexity, variability, and non-guarantee in returns, Indexed policies require more active monitoring than non-Indexed policies.
-
Non-Indexed: Earns interest at a declared rate set by the insurer, offering stability and predictable cash value accumulation with a guaranteed minimum interest rate. These policies still require monitoring but, on a much simpler level.
Actual credited interest may vary by policy, insurer, and market conditions, and is not guaranteed beyond any stated minimum.
Where other Permanent Life policies have fixed death benefits and fixed premiums paid on a predetermined schedule, these policies are flexible. This flexibility allows policyholders to determine how and when they pay premiums, or even increase / decrease their death benefit within the terms outlined in their policy as their coverage needs change. Meaning these policies may be suitable for individuals who anticipate fluctuations in income over time.
The key difference between UL’s and other Permanent Life policies is the variable Cost of Insurance (COI), which is not fixed at any point during the coverage period of a UL. The COI increases each year as you age, but your payments stay unchanged. The additional premiums are deducted from your cash value to keep the policy in effect. Policyholders must maintain adequate funding to keep the policy in force, which is where UL policies carry the highest risk.
By using this structure UL policies can potentially offer lower initial premiums than some other Permanent Life offerings depending on the insurer, policy type, and risk class. The UL’s initial premiums are generally structured so that the premiums in the early policy years exceed the COI to build cash value for later policy years. Which is where it is most important for the policyholder to fully understand how the policy works as a financial instrument and pay ongoing attention to ensure the minimum funding levels are met. Factors such as policy maintenance fees, rising cost of insurance, amount of insurance, policy loans, and policy Index performance—all contribute to the long term stability of a Universal Life policy. If these factors are not in alignment, the minimum funding levels may not be maintained which can result in cash value loss, sudden high premiums, and policy termination.
Universal Life policies may be suitable to individuals seeking flexible coverage that also accumulates cash value for future financial planning purposes through credited interest subject to policy terms. For most individuals who are seeking fixed guarantees in their insurance needs and do not anticipate a need for future financial planning purposes. Another type of Permanent Life policy may be a better fit.
Universal Life Key Points:
-
Flexible Legacy Tool: Suited for those wanting long-term protection and tax-deferred growth potential (subject to IRS limits) with control over how the policy evolves.
-
Flexible Premiums: You control how much and how often you pay, within policy limits—though underfunding can reduce long-term performance or lead to policy termination.
-
Adjustable Death Benefit: Option to increase or decrease the death benefit (subject to underwriting) without the need to buy a new policy.
-
Cash Value Growth: Accumulates interest over time and can be loaned or withdrawn from while living.
-
Interest-Linked Options: Depending on the policy type, growth may be tied to fixed interest rates or indexed to a market benchmark.
-
Permanent Protection: Offers lifelong coverage, as long as there’s enough value in the policy to support the cost of insurance and policy fees.
-
Policy Loans & Withdrawals: Access your accumulated cash value for personal needs through policy loans. Loans reduce the death benefit and may have fees or interest attached.
-
Indexed Policy Loans: Allow you to borrow against cash value while the borrowed portion continues to earn interest based on index performance. This can create potential positive arbitrage if the index credit exceeds the loan rate, but poor index performance or underfunding can increase policy lapse risk. Some policyholders use this approach in a strategy often called “Infinite Banking”, which involves using the policy’s cash value as a personal financial tool.
-
Accelerated Underwriting Available: Some insurers may offer accelerated underwriting options for medically eligible applicants, limited by coverage amount and age.
-
Cost Variability: Cost of Insurance and policy fees can change over time, affecting long-term sustainability if not properly funded.
-
Not Fully Guaranteed: Unlike Whole Life, growth and coverage duration depend on interest rates, funding, and policy performance.
-
Requires Active Management: Policyholders must fully understand their policy to monitor funding levels and avoid lapse from underpayment or poor performance.
Index Disclosure: Indexed Universal Life (IUL) policies credit interest based on the performance of an external market index but do not directly invest in the market. Credited interest is subject to caps, participation rates, and floors as defined by the insurer. Actual policy features, terms, and availability vary by state and carrier. All guarantees are backed by the claims-paying ability of the issuing insurer.
Disclosure: This information is for educational purposes only and is not intended as financial, tax, or insurance advice. Policy features and availability vary by carrier and state. Guarantees, if applicable, are based on the claims-paying ability of the issuing insurer. Actual policy performance depends on funding levels, interest rates, and other factors.