Universal Life Insurance
Universal life insurance is a permanent life insurance policy with flexible premiums and death benefits, plus a cash value component that earns interest based on current market rates.
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Exam Tip
Universal life = flexible premiums + death benefit. Cash value can vary. Policy can lapse if underfunded.
What is Universal Life Insurance?
Universal life (UL) insurance is a type of permanent life insurance that offers more flexibility than whole life. You can adjust premiums and death benefits, and the cash value earns interest based on current rates.
Key Features
| Feature | Description |
|---|---|
| Flexibility | Adjust premiums and death benefit |
| Cash Value | Earns current interest rate |
| Premiums | Flexible (within limits) |
| Death Benefit | Can increase or decrease |
How Universal Life Works
- Premium payments go into cash value
- Monthly deductions for:
- Cost of insurance (COI)
- Administrative fees
- Remaining cash value earns interest
- Must maintain minimum cash value to keep policy active
Types of Universal Life
| Type | Cash Value Growth |
|---|---|
| Traditional UL | Current interest rate, guaranteed minimum |
| Indexed UL (IUL) | Tied to stock index (S&P 500), with cap and floor |
| Variable UL (VUL) | Invested in subaccounts (like mutual funds) |
| Guaranteed UL (GUL) | Focuses on guaranteed death benefit, minimal cash value |
Universal Life vs. Whole Life
| Feature | Universal Life | Whole Life |
|---|---|---|
| Premium | Flexible | Fixed |
| Death Benefit | Adjustable | Fixed |
| Cash Value Growth | Variable rate | Guaranteed rate |
| Risk | More to policyholder | More to insurer |
| Complexity | Higher | Lower |
Death Benefit Options
- Option A (Level) - Death benefit stays level; cash value is part of benefit
- Option B (Increasing) - Death benefit = face amount + cash value
Important Considerations
- Policy can lapse if cash value depleted
- Interest rate risk with traditional UL
- Market risk with variable UL
- Indexed UL has caps on gains
Study This Term In
Related Terms
Whole Life Insurance
Whole life insurance is a permanent life insurance policy that provides lifetime coverage with fixed premiums, a guaranteed death benefit, and cash value that grows at a guaranteed rate.
Term Life Insurance
Term life insurance provides death benefit protection for a specific period (term), with no cash value accumulation, offering the lowest premium for the highest coverage.
Cash Value
Cash value is the savings component of a permanent life insurance policy that grows tax-deferred and can be accessed through loans or withdrawals during the policyholder's lifetime.
Variable Annuity
A variable annuity is an insurance contract where payouts depend on the performance of underlying investments chosen by the contract owner, offering growth potential with market risk.
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