What is universal life insurance?


Universal life insurance is a cash-value policy which is characterized by great flexibility. It was a big hit among consumers in the 1980s when it was introduced as an alternative to the more rigid ordinary whole life insurance. In a nutshell, what is guaranteed and fixed in whole life insurance is non-guaranteed and flexible in universal life insurance.

Characteristics of Universal Life Insurance

  • Possibility of varying the premium payments: the policyholder decides when, how often and how much to put towards the policy premiums. Premiums go into a cash value account from which the mortality costs and other administrative expenses are deducted on a monthly basis.
  • Flexible interest rate is credited to the cash value component which acts as a savings account. There is a guaranteed minimum interest rate of 3 or 4 percent, and a non-guaranteed current rate of 4 or 5 percent. This allows for adaptability to the changing market conditions: the policy owner can benefit from the favorable conditions it costs drop and interest rates increase. However, if the opposite happens, the policy owners will lose, and the risk is entirely passed on to them.
  • Policy buyers have the flexibility of choosing to pay additional amounts when the rate of return is attractive - earnings from the cash value are tax-sheltered but subject to federal maximums.
  • Universal life policies have a target premium - a suggested level premium which keeps the policy in force and acts as a reference point for the policyholder.
  • Universal life insurance also has no-lapse guarantee: a provision which guarantees that the policy will remain in force for a given period of time as long as the minimum premium is paid.
  • Possibility to increase or decrease the face amount at the policy owner's discretion (proof of insurability is required to increase the amount of insurance).
  • Cash withdrawals and policy loans are permitted.
  • The policyholder can add additional insureds.
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