When you purchase a life insurance policy, you're making a decision that could affect your family for years (and possibly generations) to come. Since it's impossible to predict the future, the policy you choose now might not be your best choice 10 years down the road. With a universal life policy, you could have the flexibility to adjust your coverage to suit your needs as life changes.
What Is Universal Life Insurance?
Universal life insurance is a permanent life insurance policy — and if it's managed correctly — the coverage can last your entire life. Typically, when you first buy your policy, you pay enough to build up cash reserves within the policy itself. Then, when you're older, the accumulated cash reserves can sometimes make up any difference in policy costs so you don't face increased premiums. Your financial representative can tell you how much you could pay per year to effectively prepare for your later coverage.
The design of universal life insurance gives you more control over how you manage your policy. You can change the amount you pay into the policy every year. When you have more income, you can pay more into the policy, whereas when your budget is tight, you can reduce your premium — though only if you've ensured there's sufficient cash value to cover your monthly charges.
Some universal life insurance policies also let you change their death benefit. You can decrease to a smaller death benefit or add coverage without buying a new policy — for example, increasing from $300,000 to $400,000 (this may be subject to insurability/underwriting approval).
Universal life insurance builds cash value, which you could also take out and spend while you're still alive — but keep in mind doing so could decrease the death benefit and may incur surrender charges, which can vary depending on your age, gender and underwriting class. Your cash value grows according to market interest rates. When market interest rates are high, you earn more per year. When rates are low, you earn less.
When Is It a Good Fit?
Universal life could work well for younger applicants who have more time to build their cash reserves while insurance costs are low. It's also an effective choice for applicants who want flexibility with their premiums. For example, let's say Andrew works as a construction worker and makes most of his money during the summer. He likes universal life because he can make large payments during the summer while reducing his premium payments during off-season months.
Universal life could also work well for people who are unsure of how much life insurance they need. If Tanya is a recent newlywed who wants children someday, for instance, she might not know just how big her family will get. She buys a $400,000 universal life policy that lets her adjust the death benefit. She can increase or decrease the size of her policy once her family situation becomes clearer.
Any Special Considerations?
With universal life, it helps to be disciplined and build your cash value at the beginning of your policy. Otherwise, you may not have enough in reserve to keep up with the higher future premiums. If this happens, you must pay more money into the policy or lose your coverage.
Also, any estimation of how much you need to pay into the policy to keep it in force will be based on a prediction of market interest rates and insurance costs. If this forecast is incorrect, you may also need to pay more than expected to keep your coverage.
If flexibility is important for your insurance policy, you might want to consider universal life. In exchange for a little more effort, you could have more control over your coverage terms.