Maybe you’ve never heard of Universal Life Insurance. Many people haven’t. For those who don’t want the restrictions that Whole Life policies demand but desire the benefits it’s known for, a Universal Life Insurance policy offers the flexibility and freedom other policies do not.
Understanding Universal Life Insurance
Like Whole Life, Universal Life provides lifetime coverage and cash value.
A Universal policy puts you in the driver’s seat as to how much and when you pay your premiums after your first payment. (Most companies do have a minimum requirement.)
It allows you to adjust your death benefit according to your shifting circumstances. For example, if your beneficiaries are less dependent on you for financial security, you can lower the death benefit—and thus your premium amount.
And like Whole Life insurance, Universal Life allows you to build cash value, which you can invest anywhere you wish. You can invest it in a wealth-building vehicle or use it to pay for your premiums, loosening your budget to spend your hard-earned money on other things.
A Universal Life Insurance policy is vulnerable to market fluctuations. If interest rates don’t perform well, neither will your cash value. It could dwindle to zero or fall below your policy’s value. And if that happens, the insurance company will use your death benefit to pay the difference.
And if you miss a payment, which often happens as premium payment flexibility can lull you into a false sense of security, you will lose the policy and pay back any amount owed. Insurance companies depend on your premium payment to cover their costs of doing business. If those costs are higher than what you’ve paid in premiums or have in cash value, you’ll owe it back to your carrier.
But there is a way to protect yourself from this scenario.
No-Lapse Guaranteed Life Insurance Rider
You can purchase a no-lapse guaranteed rider on top of your Universal policy to protect it against unfortunate market dips and forgotten payments. This entails adding a minimum-amount premium with a set schedule onto the traditional Universal policy but it’ll keep you paid up even if you miss an unscheduled premium.
A No Lapse Guaranteed Universal Life Insurance Policy ensures your policy won’t lapse.
Riskier Universal Life Insurance Policies
Those with a higher tolerance for market fluctuations may consider Indexed Universal Life or Variable Universal Life, both of which build cash value quicker. They do need babysitting though as they are vulnerable to changes in the market and lapse-causing forgotten premium payments.
Universal Life Insurance: Pros and Cons
• has the same benefits as Whole Life Insurance: lifetime coverage and cash value
• is less expensive than Whole Life
• offers more flexibility in how much and when you pay your premium
• gives you more control over where you’ll invest the cash value your policy provides
• is less expensive than Whole Life, but more expensive than other types of life insurance—especially if you opt for a No Lapse Guaranteed rider
• needs babysitting. If you aren’t monitoring your premium payments and investments, you could lose your coverage and owe the insurance company money.
As I said at the beginning of the article, while it’s called “universal,” Universal Life Insurance isn’t for everyone. But if you want the benefits but can’t afford Whole Life and have a risk-taker mindset, this type of policy warrants some consideration.