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How Do I Know If I Need Universal Life Insurance?

Universal life insurance is a flexible financial tool that protects your financial well-being while working with you as life changes. If you’re trying to decide what life insurance options work best for you, including universal life insurance, below are a few factors you’ll need to know.

What Is Universal Life Insurance?

Universal life insurance is a form of permanent life insurance that provides coverage from the point of purchase until the end of the policyholder’s life. Where universal life insurance differs from permanent life insurance is primarily regarding the premium. While some universal insurances will still use the traditional fixed premium amount for month-to-month payments, some don’t. Instead, they work on a flexible premium model.

How Does Universal Life Insurance Work?

The flexible-premium model that universal life insurance relies on provides a nice benefit for the policyholder. Because there is no set premium amount, a policyholder can ask to lower their monthly premiums in times of trouble while still maintaining their policy coverage. So instead of losing a policy because you can’t make a payment due to an emergency, you can temporarily drop the premium until you’re in a better position to pay the standard premium amount.

Universal life policies also build a cash value component over time as the policy is held. If a person needs to borrow against their policy for whatever reason, they can expect no tax consequences. However, they should be prepared for a lower-value policy if the cash value is used. Accessing cash components can also mean special fees and interest rates applied to the borrowed amount. This trait is similar to whole life insurance but is the opposite of a term policy, making it more of an investment.

If you’re set on a permanent life insurance policy but can’t decide between a whole policy or a universal one, consider what kind of flexibility you need. If you’re young and life circumstances constantly change, a flexible universal life policy makes much more sense than a whole policy. However, if you’re looking for a more stable and predictable policy, the best whole life insurance might be a better fit for you. Though, that’s not to say this policy type is not without its own problems. A couple of things to consider include the following:

Remaining Cash Value

If you do not access all of your policy’s cash value by the time of your death, your beneficiaries will not be able to access the value. Instead, any untouched cash value is forfeited to the insurer, and they will keep the cash value.

Interest for Borrowing Against

While you may be able to avoid tax implications in some cases of borrowing against the loan, you can expect to have interest on the borrowed amount. That’s because if you borrow against the policy, it is treated like a loan and will need to be paid back with interest.

Is Universal Life Insurance Right for You?

Much like any other life insurance type, choosing a policy has positives and negatives. In the case of universal life insurance, the benefits are unique in that no other life insurance policy offers quite the same. But those benefits come with risks and complications like cash surrender fees, the complexity of maintaining your plan, and more. To decide which option is right for you, it’s important to thoroughly work through your options and understand the benefits and detriments of each.