Universal life insurance provides coverage for your family or business with flexible premiums that may let you pay for life insurance at your own pace. Universal life policies can also build cash value1, similar to a savings account, which can be used for any purpose. Flexible universal life premiums can be especially useful for people who own a business or whose jobs produce a paycheck that varies from month to month.

Premium costs may change with interest rates and the policyholder's age.

Death Benefits

Universal life insurance provides permanent coverage so your family is protected if you die. Some universal life policies offer an option to guarantee the death benefit as long as specified premiums are paid.

Flexible Premiums

As long as your policy has enough value to cover insurance costs and administrative charges, you can decide how much premium to pay within certain limits. This means you can pay more at some times and less when you need to.

Building Account Value

Depending on the premium you choose to pay, your policy may build account value. If it builds enough, you can borrow from your policy for any reason you choose. 2

What Are the Pros and Cons of Universal Life Insurance?

Pros

• Builds cash value: The value component consists of interest the account earns based on certain rates of return, or ROR3, like an investment. You can borrow against cash value, use it to pay premiums, or surrender the policy for its cash value if you no longer need permanent life insurance. A cash value loan requires no credit check and is tax-free. If you do not repay it, the outstanding balance reduces the death benefit.
• Flexibility: You can increase or decrease the death benefit and adjust premiums if necessary. If a life event occurs, such as having a baby, you can increase the death benefit, although you will have to pay the higher cost.
• Investment strategy options: There is more than one type of universal life insurance, including indexed and guaranteed coverage. Indexed universal life offers returns from stock indexes, providing growth potential that you may withdraw later if necessary. Guaranteed universal life offers a fixed, guaranteed option to provide a death benefit up to a specified age set by the life insurance company.

Cons

• Monitoring is required: Unless you choose guaranteed universal life insurance, this is not a policy to set up and forget. If it is not adequately funded with at least the target premium, it could lapse.
  If you use cash value to pay premiums, make sure the value does not fall to a level that puts the policy in danger of lapsing.
• Building cash value takes time: It may take time to build enough usable cash value in a universal life policy, especially if you pay the minimum target premium. Paying more than the minimum can help cash value grow faster.
  Not all universal life policies are the same. Some have guaranteed growth potential and others do not, which can help you decide which type of policy and company to choose.
• An increase may require a health exam: Although the flexibility to increase the death benefit is valuable, some insurers require a medical exam for an increase.
  The cost of the larger death benefit depends on the health exam results and may be higher than you expected if you are not in good health.
  If this flexibility is a reason you are choosing universal life insurance, ask your agent about the insurer's requirements for increasing coverage.

Types of Universal Life Insurance

Although universal life insurance is generally much more flexible than a term life policy, there are several types of universal life policies to choose from based on your goals and financial situation.

Indexed Universal Life Policies, Commonly Known as IUL

An indexed universal life policy is linked to a market index. This means the savings portion of your account fluctuates with stock market performance. Your insurance company will also likely deduct an additional administrative fee for managing the account.

Be aware: this is a riskier option because it does not have a fixed interest rate, and your account's value may fall.

Guaranteed Universal Life Policies

This is a low-risk option with a fixed premium for your entire life. Your account will not grow significantly in cash value, but you will have a consistent premium that does not change with the stock market.

It is not a growth-oriented type of universal life insurance policy, but it is not volatile either.

Variable Universal Life Policies

Variable universal life insurance policies are similar to the indexed version, except that you can diversify your investments through money market accounts. Some risk remains because there is no way to predict stock market behavior, even with diversified funds.

As with an indexed universal life policy, you will also be charged administrative fees.

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

The main difference is how the account's cash value portion is managed. With whole life insurance, your premium is fixed. With universal life, your premium may change if you choose to pay it using accumulated cash value. Because the value of your cash savings can change, your premium payment may increase if your cash value declines or you borrow from it.

For more information, contact a Partners for Life advisor.

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1 Cash value in certain policies means that the premiums contributed by the insured can accumulate funds that earn interest, similar to a savings account.

2 Accessing account values through loans and/or withdrawals reduces cash surrender value and may reduce the policy's death benefit. Taking a policy loan could have adverse tax consequences if the policy terminates at maturity, upon surrender, or before the insured's death.

3 When universal life insurance policies were first introduced, they were underwritten assuming rates of return of 11% to 15%. Rate of return, or ROR, measures an investment's gain or loss over time.