Universal life insurance, or UL insurance, is a type of permanent life insurance that can potentially build cash value. This is in contrast to term life insurance, which only provides coverage for a certain number of years, and does not build cash value.
UL policies are purchased outside of workplace benefits and are usually not sponsored in any way by employers. This means that an individual desiring a UL policy would need to contact an insurance agent to make the purchase.
Universal life is for people who desire to leave a death benefit to their loved ones, who have no intention of canceling their policy in the future, and who could benefit from a policy’s cash value.
Universal life policies are subject to underwriting, meaning the insurance company will look at an applicant’s medical condition and history to determine whether the applicant proposes an acceptable level of risk. If the application is accepted, the policy is issued and the policy owner begins making periodic premium payments. If the owner fails to make timely premium payments, the policy is canceled. If the insured person dies while the policy is in force, then the insurance company will pay a pre-determined death benefit to the policy’s beneficiary. This death benefit is usually tax-free.
There are two main categories of universal life policies: fixed and variable. In fixed universal life, the policy’s cash value grows at a fixed interest rate that is stated in the policy. In variable universal life, the cash value is allocated to subaccounts, which work sort of like mutual funds. Growth – or loss – in the policy depends on the performance of those underlying investments.
Aside from the obvious fact that a universal policy provides a guaranteed death benefit, another major benefit is the policy’s cash value. Once the cash value reaches a certain level, it can be borrowed against. In a way, this enables the policy owner to be their own banker. In certain situations, there are ways to use a UL policy as a source for tax-efficient income in retirement, too.