Universal life insurance is often sold as a combination of life insurance and an investment product. Similar to whole life insurance, universal life insurance lasts for your entire life (as long as you pay your premiums) and provides a standard death benefit coverage as well as a cash value that grows over time.
While it may sound tempting to have a life insurance policy you can tap into for cash while you’re still alive, it comes at a hefty cost — universal life insurance is much more expensive than term life insurance, which provides the same death benefit minus the savings vehicle.
What Is Universal Life Insurance - is a type of permanent life insurance policy that combines a death benefit with a savings vehicle. With this type of policy, you’re guaranteed coverage for your entire life as long as you pay your monthly premiums. This policy builds up a cash value that you can borrow from or withdraw later. Compared to whole life insurance, universal life insurance offers greater flexibility since it offers adjustable premiums and an adjustable death benefit.
In general, it is not recommended to treat life insurance as an investment. The basic concept of insurance is to protect yourself financially if an unlikely but expensive bad thing happens — or in this case, protecting your loved ones who depend on your income in the case of your death.”
How Does Universal Life Insurance Work - Universal life insurance has two components: death benefit coverage and an accumulating cash value. When you pay your monthly premium, it’s split between the two parts of your policy, with a portion going to each. One component of the universal life insurance provides a death benefit to your beneficiaries when you die. Some universal life insurance policies offer a flexible death benefit, meaning your insurer may allow you to increase your death benefit — which will in turn increase your premiums (provided you take another medical exam). Typically, the death benefit component of life insurance is the most important part, since it gives your loved ones a financial safety net if you die and can no longer provide for them.
The additional feature universal life insurance has that term life insurance doesn’t is a cash value that earns interest over time based on the current money market rates. As the cash value increases, you can use it to pay your premiums, borrow against it, or withdraw it altogether. However, if you’re looking to grow your money, there are better options available. Typically the rate of investment accumulation inside a life insurance policy versus other options available to you out there, it is very slow.
Universal vs. Whole Life Insurance - whole life insurance is a type of permanent life insurance policy that covers you for your entire life. Like universal life insurance, this type of policy combines the death benefit associated with term life policies with an additional savings component.
Unlike universal life insurance, whole life policies have fixed monthly premiums, with a certain portion going toward your death benefit and the rest going toward your accumulated cash value. Whole life insurance policies often have more expensive premiums than universal life, although both are significantly more expensive than term life insurance.
A universal life plan has an adjustable cash value, and the premium can be adjustable. This means that if you lose some income in any given month, you have the option of making only your minimum payments and not the full amount. On the other hand, if you have some extra cash, you can put it towards your insurance premiums. Compared to whole life insurance, this feature of universal life insurance offers greater flexibility.
Who Qualifies for Universal Life Insurance - In general, you’re likely to qualify for universal life coverage unless extenuating circumstances cause your application to be denied. Factors that could cause you to be denied include:
- Poor physical health: Insurance companies may decline to provide coverage for individuals with serious health conditions
- Age: Most insurance companies will only provide life insurance coverage for individuals under a certain age
- Lifestyle: Insurance companies may be more likely to deny coverage to individuals with high-risk hobbies, a high-risk job, or unhealthy habits.
- Credit: Insurance companies often run credit checks before underwriting insurance policies. If you have poor credit or a poor financial history, you may struggle to qualify for a policy
- Criminal record: You may be denied life insurance coverage if you have a criminal record, especially if you have felonies on your record.
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