Life Insurance

What is Universal Life Insurance? Understanding the benefits of UL insurance

Ethos Life | May 21, 2024
Universal Life Insurance

Universal Life Insurance (UL) is a powerful financial tool designed to provide both life insurance coverage to provide peace of mind for your family, and a way to accumulate cash value. A universal life insurance policy offers a combination of death benefits and cash value accumulation, helping to provide policyholders with financial security and flexibility. To help you decide if a UL policy is right for you, first you need to delve into the fundamentals of universal life insurance, explore the benefits of UL policies, and see how it compares to term life insurance.

What is Universal Life insurance?

Universal Life Insurance, often referred to as UL insurance or a UL policy, is a form of permanent life insurance that provides coverage for the entire lifetime of the insured individual if premiums are paid and the policy remains active. Unlike term life insurance, which offers coverage for a specific term (e.g., 10, 20, or 30 years), universal life insurance is designed to last as long as the policyholder pays the required premiums.

The key feature that sets universal life insurance apart from other life insurance options is its flexibility. Policyholders have the ability to adjust the amount of their death benefit and the premium payments, allowing them to adapt their coverage to changing financial needs. 

Benefits of universal life insurance 

Before you start shopping for universal life insurance quotes, you’ll want to understand some of the advantages of a UL policy.

  • Flexibility in premium payments: Some universal life insurance policies may allow you to choose to pay more or less than the scheduled premium, within certain limits. This flexibility is especially valuable during periods of financial uncertainty or when cash flow is tight. However, the policy can lapse as a result of insufficient premium.
  • Cash value accumulation: When you have a UL insurance policy, a portion of your premium payments goes towards cash value accumulation, which grows over time on a tax-deferred basis. This cash value can be accessed by the policyholder through withdrawals or loans for various financial needs, such as education expenses or supplementing retirement income.
  • Adjustable death benefit: If your circumstances change, you may also be able to make changes to your coverage so that it aligns with your evolving financial goals. For example, you may decide to provide for dependents, or perhaps pay off a mortgage.
  • Tax advantages: With universal life insurance, the death benefit is generally income tax-free for beneficiaries, and the cash value can grow tax-deferred. Additionally, you may have the opportunity to access the cash value without triggering immediate taxable income. You should seek the assistance of a tax advisor for more information.
  • Survivorship options: Some universal life policies offer survivorship options, covering two individuals under a single policy. This can be advantageous for couples, providing a cost-effective way to help ensure financial protection for their loved ones.

What does universal life insurance cost?

The cost of universal life insurance (UL) can vary widely based on several factors, including: 

  • Age and health: Generally, younger and healthier individuals are likely to pay lower premiums for universal life insurance. Insurers assess the risk of providing coverage, and healthier individuals are considered lower risk.
  • Coverage amount: The amount of coverage, or death benefit, you choose significantly impacts the premium. Higher coverage amounts result in higher premiums.
  • Gender: In many cases, women may have slightly lower premiums than men of the same age and health status. Actuarial tables often show that women tend to live longer, influencing the cost of life insurance.
  • Smoking status: Smokers typically pay higher premiums than non-smokers. Insurers consider smoking a higher-risk behavior, which is reflected in the cost of coverage.
  • Underwriting class: Insurance companies assign individuals to different underwriting classes based on their health and lifestyle. Preferred or preferred plus classes receive lower premiums, while standard or substandard classes may have higher premiums.
  • Policy features and riders: The specific features and riders selected for the universal life insurance policy can impact the cost. For example, a policy with additional riders, such as a long-term care rider or a critical illness rider, may have higher premiums.
  • Payment frequency: The frequency of premium payments can also influence the cost. Paying premiums annually may be less expensive than paying monthly.

To get an accurate estimate of the cost of universal life insurance, you can request quotes from insurance providers. Insurance agents or brokers can assist in the process, helping you understand the various policy options and selecting coverage that aligns with their financial goals.

It's important to note that universal life insurance premiums can be higher compared to term life insurance due to the added cash value component and the potential for the policy's permanence. However, the flexibility and potential for cash value growth may still make universal life insurance an attractive option for those seeking both life insurance coverage and an accumulation element.

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Universal life insurance vs. term life insurance

If you’re not sure if you should get universal life insurance or term life insurance, here’s a closer look at how they compare:

UL life insurance:

  1. Offers coverage for the entire lifetime of the insured individual, as long as the required premiums are paid.
  2. Can adjust premium amounts and have the option to use the cash value to cover premiums in certain situations.
  3. Includes a cash value component, which grows over time on a tax-deferred basis, and can be accessed through withdrawals or loans.
  4. Offers a death benefit that is paid out whenever the insured individual passes away, as long as premiums are paid. The death benefit can be adjusted based on changing circumstances.
  5. Offers flexibility to adapt the policy to changing financial needs and goals.
  6. Can be used for income replacement, estate planning, wealth transfer, and supplemental retirement income due to the cash value component.

Term life insurance:

  1. Provides coverage for a specific term, such as 10, 20, or 30 years. If the term expires and the individual is still alive, there is no payout.
  2. Generally has lower premiums compared to universal life insurance, especially for younger and healthier individuals. Premiums remain level for the specified term.
  3. Does not have a cash value component. Premiums paid contribute solely to the death benefit during the term of coverage.
  4. Pays out the death benefit only if the insured individual passes away during the specified term.
  5. Provides straightforward coverage for a fixed period without many additional features.
  6. Primarily serves as income replacement for beneficiaries in the event of the insured's death during the term.

In summary, the choice between universal life insurance and term life insurance depends on individual financial goals, preferences, and circumstances. Term life insurance is often preferred for its simplicity and affordability, especially for temporary coverage needs. On the other hand, universal life insurance provides a more permanent solution with added flexibility and a cash value component, making it suitable for long-term financial planning. It's crucial for individuals to carefully assess their needs and consult with a financial advisor to determine the most appropriate type of life insurance for their situation.

Is universal life insurance right for you?

As with any financial decision, it's essential to carefully consider individual circumstances and consult with a financial advisor to determine if universal life insurance aligns with specific goals and objectives.

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Please note that all prices quoted are subject to change, including due to underwriting.