Universal Life Insurance at a Glance

Universal life insurance became a popular life insurance policy in the 1980s. These policies differ from the common term life insurance policies or whole life insurance policies. So what is universal life insurance? Read on to learn about what it is, how it differs from other policies, and the challenges with this type of policy.

What Is Universal Life Insurance? 

Universal life insurance is a type of permanent life insurance that is designed to accommodate investment savings. Like all insurance options, universal life insurance includes a premium. The premium has two parts with universal life. The first part of the premium is the cost of insurance. The second part is the accumulated cash value. Accumulated cash value isn’t equity though and is dependent on the interest rates. Depending on the universal life insurance policy, the cash value will be tied to an index or subaccounts. The accumulated cash value will depend on the interest rates and performance of these ties. 

Within universal whole life insurance, there are four types of policies: 

• Universal Life Insurance This policy has death benefit protection, and an accumulated cash value account that earns a projected interest, usually based on the LIBOR.
• Guaranteed universal life insurance. This policy is designed to last as long as you live (or to a certain age) without an increase in premium. Cash value is very low and sometimes non-existent in these policies. It also has the risk that if you’re late on a premium payment, you could void all guarantees.
• Indexed universal life insurance. The accumulated cash value in this policy can be tied to an index like the S&P 500. This policy comes with flexibility for premiums and death benefit. (For a detailed explanation on how IUL works read this article)
• Variable universal life insurance.  This policy can build cash value, which can be tied to subaccounts that can contain stocks, bonds, etc. The policy also requires that a policyholder is ready to monitor their subaccounts because if the underlying investments go down, the entire policy could lapse. 

How Universal Life Insurance Came to Be

Originally in the life insurance industry, there used to only be one year renewable term life insurance. These policies only covered one year at a time. With each year, the risk of death would increase, so the premiums increased too. In the long run, these policies cost policyholders a lot of money and many would cancel coverage and never receive death benefits. Because term insurance was essentially paying rent on death coverage, consumers demanded the creation of whole life insurance. 

Some policyholders, especially those who were interested in investing, wanted more options with their whole life insurance policies. During the 1980s, insurers created the universal life insurance policy  which is based on yearly renewable term insurance bundled with a cash account to allow for more flexible premiums and to allow for investments to be built into the policies.  Because of the high insurance rates in the 1980s, universal policies did well and provided many benefits for policyholders. But since the 1980s, these policies have become less frequent because of the lower interest rates. 

What is the Difference between Universal Life Insurance & Whole Life? 

A universal life insurance policy is different from a whole life policy, even though they are both permanent life insurance. These are some of the key differences between the two types of policy: 

• Whole life insurance offers fixed premiums while premiums for universal life can be flexible or changed by the insurance company. 
• Whole life includes guaranteed cash accumulation through equity while cash value accumulation with universal can fluctuate.
• Universal life cash goes into a separate account, which is different from building equity like in whole life insurance. 
• Universal life includes a cap on the amount of money made unlike whole life insurance. But universal life also includes a guaranteed minimum. 

Whole life and universal life policies both provide permanent coverage, but they are different in how they accumulate cash value versus equity. These differences are key to understanding the problems with universal life insurance and the benefits of whole life insurance. 

Problems with Universal Life Insurance

While universal life insurance was designed for flexibility benefits, there are some problems with these plans. These are some of the key problems that policyholders can experience with universal life: 

• The insurance companies can bill the policyholder for the increasing cost of insurance in universal life.  These changes can lead to higher premiums with less payout. 
• Universal life can include fees beyond the premium. All insurance policies involve a fee, but universal life policies fees are percentage based instead of a fixed number like with whole life insurance. These fees can cost thousands of dollars at times. 
• The contracts for a universal life insurance policy are large and complicated, which can cause policyholders to miss key requirements. That is where the stipulation that a late premium can void the guarantees could be found. 
• Universal life always puts the risk back onto the owner of the policy. 

Overall, while universal life was popular in the 1980s, these policies don’t provide the benefits that whole life insurance can provide. The risk always goes back to the policyholder, and the cash value relies on interest rates. Here at McFie Insurance, we can walk you through the strategy of life insurance and help you find the right policy.