Universal Life Insurance: How does it Work?

Universal Life Insurance: How does it Work?

Universal Life insurance brings together the benefits of a saving account with the protection available from term life insurance. Before exploring how Universal Life Insurance works, it is essential to understand permanent and term life insurance policies. 

  • Term life insurance Brings coverage for a given period with the guarantee of a death benefit payment on the death of the insured during the coverage period. 

  • Whole life insurance offers lifetime coverage, payment for death benefits alongside a saving or investment account. 

Essential Components of a Universal Life Insurance Policy 

  • A form of permanent life insurance

  • Tax-deductible cash value

  • The cash value can be used for security investment 

  • Adjustable premiums and policy coverage 

  • The policyholder can reduce the amount of death benefit


The terms and features of Universal Life insurance vary based on the firm, and many companies will need a medical checkup. Such a medical exam might include a physical exam, data on prescriptions, and other questions on general lifestyle and mental health. 

It is essential to be honest about every required information like medical history, lifestyle habits, weight, etc., on your policy. This is because the insurance company's dishonesty might lead to denial of the death benefit and cancellation of the policy. 

Universal Life Insurance Types 

The types of a universal life insurance policy are:

  • Traditional (Interest Rates Based on Market Fluctuation / Rates not Guaranteed / If the Cash Account Decreases the Policy could Collapse)

  • Indexed (Policy Holders can Invest their Cash Value in a Fixed Account or an Equity-Index Account / Gives Policyholders More Control Over Investments / Riskier Than Traditional Life Insurance) 

  • Variable (Allows Policyholders to Invest their Cash value Bonds, Stocks & Mutual Funds / Most Flexible Policy / Requires Hands-On Management) 

  • Guaranteed (Allows for Premiums, Benefits, & Coverage Amounts / Permanent Life Insurance with Stability of a Term Life Policy & Minimal Risk / Investment Account Accrues Little Cash value)

They provide various savings, investments, and policies to fit multiple needs.

Coverage Duration 

A typical universal life insurance policy has a maturity date. However, such maturity dates could be set as low as 80 years, making it essential to read the terms before acquiring the policy.  

For people who lived long before acquiring the policy's maturity date, you will get a lump sum payment based on your fine print. Passing away before the maturity date will qualify your beneficiaries for death benefits.


Death benefits 

Level Death Benefit

Increasing Death Benefit

Beneficiaries get the policy's face value while the insurer gets to keep the policyholder's cash value.

The heirs will qualify for a considerable death benefit as they might also qualify for the policy's cash value and the face amount.


The addition of an increased death benefit could end up adding a considerable amount to your premiums (life insurance). This is because before the insurance company pays the benefits, pending premium payments will be deducted, alongside debts that have to do with cash and loan withdrawals. 


Principle of Universal Life Insurance 

There are two parts to Universal life insurance.

  • An investment account: While this account starts with a small amount, it will grow with time as one makes the necessary premium contributions and invests the policy's cash value. Also, a decline in the stock and security could translate to a loss in the value of the stock. 

  • A death benefit is the total money your beneficiaries will likely get on your death.

In buying this policy type, you will have premium payments that enforce the death benefits while funding the investment account gradually.

While your investment account can grow faster than how it would result in normal whole life insurance, it depends on the annual return rate of the stock market.


How to use the Accumulated Cash Value of Your Policy 

A typical policy has a tax-deferred accumulated cash value which makes it possible to use such growth in various ways:

  • Pay for the policy: the proceeds from the investment amount can cover the total or partial payment of the policy, which gives way to flexible premiums.

  • Have Withdrawals: one can withdraw funds from the cash value of the policy. The tax treatment varies, depending on where you withdrew – the basis or the excess cash. 

  • Borrow against the cash value: it is possible to take policy loans from one's investment account. It is, however, essential to repay such a loan with interest to prevent the insurer from deducting the due amount from the cash value of the policy—the policy lapses in the absence of enough cash to take care of the amount owed. 

  • Adjust your Death benefit Amount: it is possible to increase the death benefit value later down the years without writing it all over again.



Contact Member