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Understanding Universal Life Insurance

Life Insurance
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Permanent life insurance may be able to help provide a sense of financial stability for your family, protection for your business, and even a lasting legacy for the people and organizations that are meaningful to you. Universal life insurance — designed to last for a lifetime — can help you achieve all of these goals1.

How Universal Life Insurance Works

Premiums for a universal life policy are paid into your policy's account, where they can earn interest. You select the amount of insurance ("selected amount") and periodic premium ("planned premium") that you'll be billed. Every month, various deductions — like a charge for insurance protection and other policy & rider charges — are deducted from the policy. What remains — plus any interest credited — is the policy's account value.

The Flexibility of Universal Life Insurance

The key feature of a universal life insurance policy is flexibility. This flexibility is provided in three ways:

  1. The Premium You Pay3
    Universal life insurance gives you flexibility — premiums are discretionary as long as the policy has a positive cash value. This gives you freedom to change premium payment amounts as your life changes. For example, if you're just starting out with life insurance, universal life allows you to make lower payments with a more limited income. As your income grows, time passes, and more discretionary income becomes available, universal life, within limits, allows you to make additional payments or increase payment amounts, which can produce greater cash value. The flexibility to increase premiums is subject to the terms of the policy and applicable laws.

  2. The Death Benefit You Choose
    Universal life's adjustable death benefit also provides flexibility. As you go through the different stages of life, responsibilities change — causing coverage needs to change. The death benefit in universal life may be increased to provide additional protection as your family grows, if you buy a new home, or business opportunities present themselves. (But proof of insurability is required to increase2 your death benefit). The death benefit could also be decreased as children leave home, a mortgage is paid off or other events occur. Decreases in coverage are subject to policy limits. Universal life policies are subject to the policy's maturity provisions.

  3. The Value of the Policy
    If you choose universal life, you may want to focus on using the flexible premium option to pay more than the amount of the monthly policy charges so the policy grows — this is particularly true as you receive additional income. Universal life can give you a chance to grow your policy's value substantially by paying as much premium as you'd like into the policy, subject to the terms of the policy and guideline premium limitations. Your policy (if cash value is sufficient) can then be used to help pay for college expenses, to get a leg up on retirement planning, or saved in case of emergency4. You must also keep sufficient cash value in your universal life policy to ensure its no-lapse guarantee5 and extended coverage benefits remain in force.

The Tax Advantages of Universal Life Insurance

Life insurance products like universal life may provide favorable tax advantages when compared to certain other products. Withdrawals up to the amount of premiums paid are not subject to income taxation under income tax law. Also, unlike annuities, cash value withdrawn from your policy (so long as it is not a MEC) is not subject to IRS pre-59 ½ withdrawal penalties. Finally, the death benefit from a life insurance policy passes generally income tax-free to your beneficiaries.


1 When a person reaches the age of maturity, their policy will pay out the cash value of the policy and the life insurance coverage ends.

2 Increases in coverage are subject to underwriting based on health and other factors.

3 There must be enough cash value in the policy to cover monthly charges if a lower premium is paid than the amount selected at issue or if a premium payment is skipped. Additional premium payments may need to be made to keep the policy in force.

4 Loans, which will accrue interest, and withdrawals can generate an income tax liability, reduce the Account Value and the Death Benefit, or may cause the policy to lapse. Sufficient premium and account value is necessary to cover insurance costs. Index returns do not guarantee that the policy will stay in force.

5 By paying only the No-Lapse Guarantee Minimum Monthly Premium you may be forgoing the opportunity to build a higher Account Value. Withdrawals, loans and late payments may require that additional premium be paid to keep the No-Lapse Guarantee active. You may need to make significant additional premium payments after the No-Lapse Guarantee expires to keep your policy in force. Non-payment of the Minimum Monthly Premium, or changes to the Specified Amount or Death Benefit Option may also cause a loss of the No-Lapse Guarantee feature.

The information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. This material is not intended to be used, nor can it be used by any taxpayer, for the purpose of avoiding U.S. federal, state or local tax penalties. This material is written to support the promotion or marketing of the transaction(s) addressed by this material. This material is being provided for informational purposes only. Columbus Life does not provide legal or tax advice. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Federal and state laws and regulations are complex and are subject to change. Consult an attorney or tax advisor regarding your specific legal or tax situation. There are insurance related costs to a life insurance policy. Premiums paid must produce sufficient cash value to pay insurance charges.