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What Is Universal Life Insurance?

Updated: May 2017

Universal life insurance is a type of permanent life insurance. Like most permanent life policies, universal life combines a savings component with lifelong protection. As long as 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.

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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, says the Insurance Information Institute (III). 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, the III says, 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, says the III. 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, says the III2,3. Likewise, you might choose to reduce the death benefit, to reduce the cost of the policy.

What Is the Difference Between Universal Life Insurance and Whole Life Insurance?

With a universal life insurance policy, you may be able to adjust your premiums and death benefit to suit your needs. With a whole life insurance policy, on the other hand, the premiums and death benefit are fixed.

Benefit Whole Life Insurance Universal Life Insurance
Lifelong protection, as long as premiums are paid Yes Yes
Cash value Yes Yes
Interest on cash value Guaranteed rate of return In line with current money market rates
Premiums Fixed Flexible
Death Benefit Fixed Flexible

Who Might Choose Universal Life Insurance?

The III offers some guidelines on how to decide whether permanent life insurance like universal life is right for you.

You seek lifelong protection.
You might be a candidate for a permanent policy like universal life if you're looking for a long-term death benefit — maybe it's to leave your family with a nice, potentially tax-free, inheritance or to make a final charitable donation.

You have long-term savings goals.
If you want to build tax-deferred savings and you don't expect to tap into the funds for a long time, you might also be a candidate for a permanent policy like universal life, the III says. That's because the cash value (which is what you can borrow against) takes a while to build up; keep in mind, though, that the amount available to you, and the point at which you can begin accessing the cash value, will vary by company.

Of course, there's more to consider before you answer the question of whether universal life insurance is right for you. That's why it can be a real benefit to talk with an agent who can review your personal situation and your life goals to help you decide.

Related Resources:

Life insurance offered through Allstate Life Insurance Company and Allstate Assurance Co., 3075 Sanders Road, Northbrook IL 60062; American Heritage Life Insurance Co., 1776 American Heritage Life Drive, Jacksonville FL 32224. In New York, life insurance offered through Allstate Life Insurance Co. of New York, Hauppauge NY.

1Loans or partial withdrawals can reduce the policy's cash value and death benefit, can increase the possibility of policy lapse, and may result in a tax liability. Consult a tax advisor for additional information on the tax treatment of loans or withdrawals from a life insurance policy.

2Increases in benefits are subject to underwriting approval. Changes to benefits can have income tax consequences. Consult a tax advisor for additional information.

3Increases to the death benefit require underwriter approval, which means the insured may need a new medical exam. Changes to the death benefit can also have income tax consequences. Consult a tax advisor for additional information.

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