Universal life insurance is a permanent policy with a savings component. Along with offering lifelong coverage, it builds cash value (also called the cash surrender value, or CSV) over time and often gives you the freedom to adjust your premium and death benefit.
While each universal life insurance policy will vary in its features, generally you can expect that a portion of your premiums will go towards the death benefit, while another portion is invested to build up the cash value. The cash value grows through accounts that offer a fixed interest rate set by the insurer, interest earned from a chosen investment portfolio, or returns tied to the performance of a stock index.
Once you’ve accumulated enough cash value, you’ll be able to take out loans against your policy. Eventually, you may also be able to use the cash value to cover your premiums.
With universal life insurance, you’ll likely have the option to adjust your premium and death benefit to suit your needs and financial situation.
When you die, your beneficiaries will receive a death benefit equal to the face value of your policy. You could have the choice of multiple beneficiaries, and decide how you’d like the money to be allocated between each.
Universal life insurance has its perks, like flexible premiums and the ability to use your policy’s cash value to cover premiums later in life. But thanks to its investment component, it requires a higher risk tolerance and a more hands-on approach than term or whole life insurance.
Since it’s a complicated product, it’s best suited to those with complex financial needs. This may include parents with special needs children, or wealthy individuals who want to treat their life insurance policy as an estate planning tool after maxing out more traditional savings options.
Indexed universal life insurance (IUL) differs from more traditional universal life insurance (UL) in one significant way: IUL allows you to tie your policy’s cash value to a market index, like the S&P 500.
The market index you attach your policy’s cash value to is often capped, which limits how much you can earn with IUL. If the S&P index is capped at 4%, it means your IUL cash value can earn up to 4% of what the S&P index earns only.
| Traditional life insurance (UL) | Indexed universal life insurance (IUL) | |
|---|---|---|
| Permanent | Yes | Yes |
| Builds cash value | Yes | Yes |
| Policy options — death benefit and premiums | Flexible | Flexible |
| Cash value rates | Fixed by provider | Tied to market index |
| Potential for investment growth | Conservative, stable | Assertive, fluctuating |
This policy is a hybrid product with elements of variable and universal life insurance. The exact set of features of this hybrid policy will vary between companies. Some common distinctions made about variable universal life insurance policies include having flexible premiums, and a greater ability to diversify and personalize your investments.
While this product offers a high potential for return, it also comes with a higher degree of risk — making it best for high-income earners with prior investment experience.
If you’re interested in a permanent policy, consider whole life insurance. It offers similar benefits, like lifelong protection and the potential to build cash value. The cash value grows at a fixed rate, and the premiums stay the same for the life of the policy.
If you only need life insurance for a set period of time, look into term life insurance. This policy is cheaper, and provides protection for a specified term — like 10, 15, 20, 25 or 30 years or to a particular age, like 65. While it doesn’t have an investment component, it offers predictable premiums for the length of your term. If you die during the term, your beneficiaries will receive a death benefit. And if you outlive your policy, your coverage will expire.
Universal life insurance is a permanent policy that allows you to adjust your premiums and coverage amount and accumulate cash value. But it’s expensive, and you’ll need to stay on top of your policy’s available cash value to avoid losing your coverage.
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