Understanding Universal Life Insurance

Critical to making an informed coverage choice is understanding universal life insurance for both its benefits and its drawbacks. On the one hand, universal life is arguably the most flexible type of life insurance. Policyholders can alter the death benefit, or survivor benefit, as required to accommodate their changing needs. Additionally, universal life accrues cash value at a competitive interest rate over time, which supplements the guaranteed death benefit your beneficiary or beneficiaries will receive when you die.

On the other hand, universal life is also fairly expensive compared to other forms of life insurance, including traditional whole life insurance and term life insurance. Whole life premiums are generally higher because they pay for the death benefit of your policy in addition to the investment component. Your money then goes toward your coverage as well as the accrual of cash value. Built in to your universal life insurance premiums are two primary expenses: mortality costs and administrative fees. Your insurer is required to fully disclose the amount of both of these costs.

What Makes Universal Life Different?

What sets universal life apart and makes it more expensive is its flexibility and complex investment component. Depending on your policy, your insurer will devote part of your premiums to various investment opportunities to grow your policy's cash value. While universal life is higher priced than other policies, the beneficiary or beneficiaries of such policies also typically receive a more substantial death benefit upon the policyholders passing. If you leave the cash value of your universal life insurance policy untouched, the entirety of the amount will pass on to your beneficiaries in addition to your survivor benefit.