Universal Life Insurance

Universal life insurance is a permanent life insurance policy with investment aspects and flexible policies. Universal life insurance rates vary depending on the person, and any increased death risks will increase your universal life insurance rates.

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Eric Stauffer is a former insurance agent and banker turned consumer advocate. His priority is to help educate individuals and families about the different types of insurance they need, and assist them in finding the best place to get it.

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Leslie Kasperowicz holds a BA in Social Sciences from the University of Winnipeg. She spent several years as a Farmers Insurance CSR, gaining a solid understanding of insurance products including home, life, auto, and commercial and working directly with insurance customers to understand their needs. She has since used that knowledge in her more than ten years as a writer, largely in the insuranc...

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Reviewed by Leslie Kasperowicz
Farmers CSR for 4 Years

UPDATED: Oct 29, 2021

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For most people, life insurance is an integral part of planning for the future.  Although it’s never fun to think about what might happen to your family after you’re gone, planning for that eventuality is important.  You want to ensure that your loved ones are well cared-for and that lingering debts and funeral expenses do not place any undue hardship on them.  You may also want to leave behind some money that could go toward improving your family’s life, whether by paying off a home mortgage or covering the costs of a child’s tuition.

While any insurance policy can provide these benefits, some policies offer additional perks as well.  Permanent life insurance policies, such as whole life and universal life, couple the benefits of life insurance with a long-term investment vehicle.  Universal life is not for everyone, however, so doing your research before buying such a policy can help you ensure that you’re making the best choice for your family.

How Does Universal Life Insurance Work?

In order to understand universal life insurance, it helps to discuss the other types of policies available: term and whole.  Term life insurance is the simplest form.  In a term policy, you buy protection for a predetermined amount of time.  If you die at any point during that term, your beneficiaries receive the face value of the policy.  If you live to the end of the term, you lose all the money paid into the policy and must buy new insurance if wish for coverage to continue.

Whole life insurance is a permanent policy.  Instead of paying for a specific term, you purchase the policy and pay premiums for life.  As long as you continue to pay your premiums, you will be insured.  Additionally, a portion of your premiums are invested on your behalf, and you share the dividends with your insurance company.  This gives your policy cash value, which can be borrowed against or liquidated.

Universal life insurance is very similar to whole life.  It’s a permanent life insurance policy with an investment aspect.  One important difference between a universal and whole policy is that universal policies are more flexible.  In a whole life policy, you are locked into a specific rate and face value for the duration of your contract.  In other words, your death benefit and premium amounts will never change.  In a universal life insurance policy, however, you can control both of these things.  This allows you the freedom to modify your policy as needed to keep up with your changing lifestyle.

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Cash Value vs Face Value

Your policy’s face value is the death benefit amount that will be awarded to your beneficiaries.  For example, a policy with a $100,000 face value would give a guaranteed payout of $100,000 when its policyholder died.  The higher the policy’s face value, the higher its premiums will be.

The cash value refers to the amount of additional money invested in the policy.  This figure will generally grow over time if you do not remove any funds from the policy.  Upon death, the cash value of the policy will be paid out alongside its face value.  This means that you can invest money into a universal life insurance plan as an easy way to pass money to your heirs without it being included in the rest of your estate.  You can also use your accumulated cash value to pay off your premiums, which allows a well-aged policy to pay for itself.

What Does Universal Life Insurance Cost?

Like all insurance policies, universal life rates vary from one person to the next.  Anything that increases your risk of dying will cause your rates to increase:

  • Obesity
  • Smoking
  • Alcohol usage
  • Preexisting medical conditions
  • Family medical history
  • Dangerous career or hobbies

Before you obtain any type of life insurance policy, you will need to get a thorough health examination.  The results will affect the cost of your premiums.  Rates will also vary between insurance companies, so be sure to get several quotes before settling on any particular insurer.  If you’re accustomed to term policy rates, be aware that universal life insurance tends to be much more expensive.

Should I Get It?

There are many benefits to universal life insurance, but it’s not the right choice for everyone.  The expense of a universal policy may make it less attractive to someone operating on a tight budget.  As an investment vehicle, life insurance is not as effective as other types, and some financial experts advise against universal life insurance for that reason.

In general, there are three primary reasons to get a universal life insurance policy:

  • You have substantial assets and wish to give some money directly to your beneficiaries without those funds being tied up in your estate after death.  The cash value of your policy can act as a vehicle for this money and ensure that a good amount is left to your beneficiaries immediately.
  •  You want to buy a policy when you are young and healthy and not need to worry about qualifying for life insurance later in life.  Although universal life premiums will be higher than term premiums for a similar policy, over time you may be able to reduce your payments by using the policy’s cash value.
  •  You want your policy to have a cash value.  If the idea of losing the premiums you’ve paid to your term life policy bothers you, universal life insurance may be more appealing.  The ability to borrow money from the policy later can also be useful.

Ultimately, it’s up to you to decide whether a universal life insurance policy is the right fit for you and your family.  Once you’ve made your choice, get quotes from several insurance companies to find a policy that will fit your needs and your budget.

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