"Destiny is no matter of chance. It is a matter of choice." —William Jennings Bryan
Choice is what makes universal life insurance different from whole life insurance. They both cover you for your entire life, and they both contain a cash value account attached to your policy, but there’s one very important difference: you. With this policy, you control what you pay and when.
Here's what universal life insurance offers:
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Here is a very basic definition to get you started:
|Universal life insurance pays an agreed-upon amount of money to a person’s beneficiaries when he or she passes away. The policy also contains a cash value account that can be used for investment purposes, and allows the policy owner to change the payment schedule and payment amounts.|
This type of policy gives you permanent coverage, unlike term life insurance.
Unlike whole life insurance (the other type of permanent life insurance), it allows you to make payments on your schedule. You choose how much and when to pay. All you need to do is make sure there's enough in the account to cover the periodic account maintenance fees charged by most carriers. If the William Jennings Bryan quote above makes you feel like the world is your oyster, this may be the right kind of policy for you. If it makes you feel like you need an antacid tablet, you may want to think about a type of policy less dependent on you to monitor and make choices.
This type of policy works for a range of individuals and families.
Universal life insurance gives you major control over your policy.
Not only do you control the payment schedule and payment amounts, but you control the way those payments get split up. Your universal life insurance policy has two components: the insurance portion and the cash value portion.
The insurance portion is what funds the death benefit—the amount of money your beneficiaries will be paid when you die. The cash value portion is like an enforced savings account. You get to choose how much of your monthly payment funds each part.
Build up the insurance portion if you’re really concerned about your family’s financial security, or build up the cash value portion if you’re looking for a future source of money to draw from in your own lifetime. (Bonus! Once your cash value account has enough money, you can use it to make your monthly payments.)
As you’ve probably guessed, universal life insurance is more expensive than term life insurance. Because you’re in charge, the insurance company has to invest the money in your cash account as you instruct. To do this, they need to have knowledgeable staff and access to investment vehicles. This costs them money, so you can expect them to charge you a little more for this privilege.
However, a universal policy is cheaper than a whole life insurance policy for the exact same reason. Think of it as outsourcing—the insurer is outsourcing the investment to you. It’s your job to monitor it, track payments, make decisions, etc. While they need to maintain the staff to carry out your wishes, they don’t have to pay a think tank to make smart investing decisions. (Those guys—the suit guys—probably work in the whole life insurance department.)
Periodically, your insurer will deduct small fees from your cash value account to cover the cost of administration. It’s up to you to make sure there’s enough money in the account to cover the cost of these fees. You’ll see each expense itemized as it hits your account so you can keep track. In contrast, you won’t get an itemized list of expenses associated with your whole life insurance cash value account. The insurer manages that account for you and won’t report what makes up their administrative costs.
These policies are a bit more complicated than a simple term life policy. To make sure you have a good idea of what your responsibilities are, let’s make a list.
What You Must Do
And After That?
Variable universal life lets you invest your money.
One interesting policy variation is called variable universal life. Think of it as a Cirque du Soleil contortionist—it doesn’t get any more flexible than this.
You can control your:
Because you have the ability to control where your money is invested, you also have a bit of risk to manage. Your death benefit amount will decrease if your investments do poorly, or it may rise if your investments do well. Many policies help you tolerate this risk by offering a guarantee that your death benefit won’t drop below a particular point.
Because of the risk involved with a variable universal policy, it’s regulated by both the Securities and Exchange Commission and your state’s insurance commissioner. This probably won’t affect the day-to-day workings of your policy, but it’s good to know. (Because knowing is half the battle.)
Yes, universal life insurance gives you the ability to borrow against the cash value of your policy. (If you’re keeping score, whole life insurance also offers this benefit, but term life does not.)
If it’s been a few years and your cash value has grown, you can borrow against that money to do…well, pretty much anything you want. You don’t have to jump through hoops to get it, either. There are no credit checks and no scrutiny of your bank records. If you routinely walk into fast-food restaurants without shoes or a shirt, you can still borrow against your life insurance’s cash value. We don’t judge.
Bonus: The interest rates for this type of borrowing are significantly lower than what you’d get from a bank or a credit card company. If you don’t repay the loan, your insurer will just use the money in your cash value account to cover the amount you borrowed.