Universal life insurance is a type of permanent life insurance. Like most permanent life policies, universal life combines a cash value component with lifelong protection. If you pay the required premium, the policy remains in force until you die. When you pass away, the death benefit is paid out to your beneficiaries.
What Are the Benefits of Universal Life Insurance?
Beyond lifelong protection, there are a few additional features of universal life:
- You can withdraw money or borrow against it.
- Your cash value earns interest.
- You have flexibility with premiums.
- You can adjust the death benefit.
Withdraw Money or Borrow Against It
When you pay your premium, a portion of each payment goes toward the death benefit, but a portion also goes to building up the policy’s savings component (also known as the “cash value”). Over time, after money has accumulated, you can withdraw or borrow against the cash value of the policy for emergencies (the available amount will vary by company)1. However, it’s important to know that this may cause a reduction in the policy’s death benefit or create a tax implication for you to manage.
Earn Interest on Cash Value
The cash value of a fixed universal life policy generally earns interest that’s in line with current money market rates. Of course, the interest rate will fluctuate along with the market, which means the interest you receive may also go down, but some companies offer protection against that with a minimum performance guarantee on the policy.
Flexibility with Premiums
You have the ability to lower or even stop paying premiums on a universal life policy, as long as the cash value of your account can cover the costs. This can be helpful if money becomes tight. But there can be negative consequences, too. For instance, your coverage may end if you use up the account’s cash value to pay for premiums.
Adjust the Death Benefit
The flexibility of a universal life policy also extends to the death benefit. After a time, you may want to increase the amount that’s paid out upon your death, which is something that many companies allow for as long as you pass a medical exam. Likewise, you might choose to reduce the death benefit, to reduce the cost of the policy.