How does universal life insurance work?
Universal life insurance comes with lifetime coverage, which means it doesn’t expire. The policy remains in effect for the rest of your life, assuming you continue paying the premiums. Most people choose to purchase universal life insurance for its lifetime coverage, flexible premiums, and cash value growth.
When you pay your premiums, a portion will go toward the death benefit and another portion will go toward building up your cash value. As your cash value grows over time, it’ll begin to earn interest. And the funds grow on a tax-deferred basis, so you won’t owe any taxes on your earnings or interest.
Once the funds have accumulated, you can borrow against the cash value of the policy. You can access the cash value of your universal life insurance policy in a few different ways:
Surrender value: If you no longer want your policy, you can surrender it to your insurer and receive the cash value in return.
Loan collateral: You can also take out a policy loan and use your cash value as collateral. But you’ll pay interest, and if you pass away before the loan is repaid, the insurance company will likely deduct the remaining loan balance from your death benefit amount.
Premium payment: You can also use your cash value to make your premium payments.
One of the main advantages of choosing universal life insurance is the ability to adjust your premiums. You can choose to pay more or less than your scheduled premium payment.
If you pay extra on your premiums, the additional funds will go toward your cash value. Alternatively, if you need to pay less than your scheduled premium payment, you can draw from your cash value to cover the difference.
Universal life insurance may cost more than other types of life insurance, like term life, because of its cash value component. The exact cost will depend on your age, your overall health, your lifestyle, and the insurance company you choose.
A life insurance premium is the amount you pay to an insurance company for a policy. Depending on the insurer and policy, you may be able to pay your premium monthly, quarterly, or annually.
When you purchase universal life insurance, you have to decide what kind of death benefit you want to be paid. You have two options to choose from:
Level death benefit: If you choose a level death benefit, the benefit amount stays the same over the life of the policy, but the insurer’s obligation decreases. For example, let’s say you purchase $250,000 in coverage and save an additional $50,000 in cash value. When you die, your beneficiaries will receive $250,000 — $50,000 from the cash value and $200,000 from the insurance company.
Increasing death benefit: If you choose an increasing death benefit, your beneficiaries will receive the cash value and the death benefit when you die. So if you have $250,000 in coverage and $50,000 in cash value, your beneficiaries will receive the entire $300,000.