Universal life insurance is a type of permanent life insurance that offers flexible death benefits, premiums, and cash value savings options. And while universal life insurance policies tend to be a more complex life insurance product, those searching for the right life insurance policy may be wondering if they'd even qualify. The good news is many people can qualify for universal life insurance, and there are different types to choose from.
What is universal life insurance?
Universal life insurance is a permanent policy that offers lifelong coverage. Like a term life insurance policy, it offers a death benefit that will be paid out to designated beneficiaries tax-free upon the policyholder's death. But universal life insurance also builds cash value. And as cash value accrues, the gains grow tax-free.
When a policyholder makes a payment on a universal life insurance policy, some of that payment goes toward fees and premium, while the rest goes into the cash value account. And the policyholder can borrow against that cash value account while they're alive, albeit for a fee, as with a whole life insurance policy.
But the big differentiator between whole life and universal life is that with a universal life policy, there's flexibility to adjust the death benefit, premium payments, and savings option. And the types of changes that can be made depends on the policy.
Types of universal life insurance
There are three main types of universal life insurance:
- Guaranteed universal life (GUL): A GUL policy has a death benefit and premium payments that will not change. And this policy often has little or no cash value, making it the least expensive option. Policyholders should keep in mind that the policy can be terminated with a single late or missed payment, so they should make sure they can make consistent payments before applying.
- Variable universal life (VUL): The draw of a VUL policy is that the policyholder chooses how to invest the policy's cash value. And that means returns are based on how well the investments are chosen and perform over time. Policyholders may also be able to choose a fixed interest rate investment if they'd rather not manage investments themself. High fees and complexity mean a VUL policy needs to be heavily vetted before committing. Also keep in mind that this policy generally contains risk of loss of cash value and you should talk to an appropriately licensed financial advisor before purchasing a variable policy.
- Indexed universal life (IUL): IUL policies may offer some flexibility in premium payments and death benefits. Of the premium paid into the policy, some of it covers fees and charges, while the rest goes into cash value. And the cash value in an IUL policy may be tied to a stock market index, like the S&P 500. But participation rates and caps may mean that the gains received in the account are only a fraction of what an investor would get by putting money directly into the stock market. Since IUL policies can also be complex, it can be important to understand the big picture and projected returns before signing up.
Eligibility for universal life insurance
Several factors influence who may be approved for a universal life policy and how much it will cost:
- Age: Insurers typically offer better rates to younger applicants. And while policies may cover up to 100 years old or greater, the cost of purchasing a policy later in life can be more expensive.
- Health: Those in better health are more likely to receive approval and lock in better premium rates.
- Lifestyle: Unhealthy habits like smoking, living a risky lifestyle, or having a high-risk job could lead to denial of coverage or higher premiums.
The bottom line
A universal life insurance policy is a complex financial product that blends life insurance with an investment component. While anyone may qualify for a universal life insurance policy, insurers typically look for younger, healthy, risk-averse individuals to approve for the best rates. Those interested in a universal life insurance policy should consult with a financial advisor to advise on the right move for their unique financial situation.
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