What Is Universal Life (UL) Insurance?

Universal life (UL) insurance is permanent life insurance (lasting the lifetime of the insured) that has an investment savings element and low premiums similar to those of term life insurance. Most universal life insurance policies contain a flexible-premium option, but some require a single premium (single lump-sum premium) or fixed premiums (scheduled fixed premiums).

A UL insurance option provides more flexibility than whole life insurance. Policyholders can adjust their premiums and death benefits. UL insurance premiums consist of two components: a cost of insurance (COI) amount and a saving component, known as the cash value. As the name implies, the COI is the minimum amount of a premium payment required to keep the policy active. It consists of several items rolled together into one payment. COI includes the charges for mortality, policy administration, and other directly associated expenses to keeping the life insurance policy in force. COI will vary by policy based on the policyholder’s age, insurability, and the insured risk amount.

Much like a savings account, a UL insurance policy can accumulate cash value. In a UL insurance policy, the cash value earns interest based on the current market or minimum interest rate, whichever is greater.

Accordingly, as cash value accumulates, policyholders may access a portion of the cash value without affecting the guaranteed death benefit. However, the withdrawals will be taxed.

Also, depending on when the policy and premium payments are made, earnings will be available. These earnings will be either last in, first out (LIFO) or first in, first out (FIFO) funds. Upon the death of the insured, the insurance company will retain any remaining cash value, with beneficiaries only receiving the policy’s death benefit.

Universal life policyholders may borrow against the accumulated cash value without tax implications. However, if they do, interest will be calculated on the loan amount, and there will be a cash surrender fee. Unpaid loans will reduce the death benefit by the outstanding amount. Unpaid interest on the loan will be deducted from the remaining cash value.

Unlike whole life insurance policies, which have fixed premiums over the life of the policy, a UL insurance policy can have flexible premiums. Policyholders can make payments that are more than the COI. The excess premium is added to the cash value and accumulates interest. If there is enough cash value, policyholders may skip payments without the threat of a policy lapse. That said, policyholders must be attentive to the rising cost of insurance as they age. Depending on the credited interest, there may not be enough cash value to keep the policy in force. Subsequently, this requires them to pay higher premiums. Missed payments must be paid within a specific time frame for the policy to remain in force.