Universal life insurance is one of the most flexible types of life insurance policies available. It falls under the "cash value" or permanent life umbrella, and formally separates the life insurance portion of the universal life insurance policy from the cash value portion of the policy.
Universal life insurance allows for flexible payment
Universal life insurance policies offer the flexibility of not having to make regular premium payments after the first year. Within certain limitations, you can make payments whenever you want — or never, if the cash value of the policy is large enough. Typically, a target premium is set based on the amount you need to pay to keep the policy in effect until you’re 100. Universal life insurance policies are very flexible — if you decide not to pay premiums, the insurance company simply deducts the cost of maintaining the insurance from the cash value portion of the policy. In addition, the death benefit itself can be increased or decreased without having to buy a new insurance policy.
Universal life insurance interest rates
Universal life insurance policies typically guarantee a minimum interest rate, but if the insurance company’s investments grow at a higher rate, this increase is passed on to you. Universal life policies have the potential to offer a greater return if the insurance company’s investments are especially strong. Also, the interest earned inside a universal life policy grows tax-deferred and can usually be accessed without taxation by making policy loans.
When you take out a universal life insurance policy, you have two options for determining the amount of the final death benefit.
- Level death benefit, typically called Option A or Option 1. The level death benefit is determined when the policy is taken out.
- Increasing death benefit, typically called Option B or Option 2. The death benefit equals the sum of the original face amount plus the cash value. The death benefit increases with the increase in cash value.
Universal life insurance may make sense for you if you:
- Want to ensure that you have life insurance coverage over your entire lifetime.
- Want the flexibility to suspend or resume premium payments as you need to.
- Want the option to increase or decrease the death benefit of the policy.