Insurance

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

FeatureDescription
FlexibilityAdjust premiums and death benefit
Cash ValueEarns current interest rate
PremiumsFlexible (within limits)
Death BenefitCan increase or decrease

How Universal Life Works

  1. Premium payments go into cash value
  2. Monthly deductions for:
    • Cost of insurance (COI)
    • Administrative fees
  3. Remaining cash value earns interest
  4. Must maintain minimum cash value to keep policy active

Types of Universal Life

TypeCash Value Growth
Traditional ULCurrent 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

FeatureUniversal LifeWhole Life
PremiumFlexibleFixed
Death BenefitAdjustableFixed
Cash Value GrowthVariable rateGuaranteed rate
RiskMore to policyholderMore to insurer
ComplexityHigherLower

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

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