What is Universal Life Insurance?

There are many different types of life insurance available. Many people have heard of “term life insurance” and “whole life insurance” but with universal life insurance not only can you ensure that your family is provided for in the event of your death but you can also build your savings at the same time. So what is universal life insurance and how does it work? 

Universal life insurance may be the right option for you if you want to grow your savings at the same time as protecting your family in the event of your death.

What is Universal Life Insurance? 

Universal life insurance, also known as adjustable life insurance, combines the elements of term life insurance along with investment savings. It gives you the ability to grow your savings but at the same time provides you with a life insurance policy that will look after your loved ones after you have passed away.

It allows you, within reason, to choose the amount you pay for your premiums. The minimum is set by the cost of your insurance, any amount that you pay over this is added to your cash value.

How does it work? 

There are two parts to your universal life insurance – 

  • The Cost of Insurance or the COI – This is the minimum amount to keep your insurance policy active. 
  • Savings component – Also known as the cash value. This will earn interest based on the current market or minimum interest rates. 

When you pay your monthly insurance premium a portion of this will be put towards your insurance policy so that after you have passed away your family will receive a lump sum payment. Another portion in excess of the ‘cost of insurance’ is then collected as the cash value.

The goal is that over time this cash value will grow and cover the cost of the insurance premiums, therefore giving you whole life insurance without the expensive premiums that come along with it.

In most cases the earlier you take out your universal life insurance policy the better as this gives plenty of time for your investments to build up.

Typically any kind of life insurance is cheaper the younger you are so although in your early twenties you will hopefully have many more decades to live, by taking out universal life insurance at that point it can bring you many benefits. 

What are the benefits or universal life insurance – 

  • Universal life insurance allows you to build your wealth through the cash value whilst still giving you the security of a life insurance policy. 
  • As the cash value accumulates you may be able to access a portion of this money or borrow money against it. Any unpaid loans will reduce the payout amount in the event of your death. 
  • You can adjust the payout that your family will receive. You can also lower or increase the premium payments depending on how much cash value you have accumulated. This differs to a whole life policy where the premium amount is set for the duration of the policy. 

NOTE: As you age the cost of your insurance will increase so it is important that you keep on top of the cash value. 

What are the disadvantages?

  • The interest rate is often dependent on the current market conditions. If the policy does well then there is lots of potential to grow your cash value, however if it doesn’t perform as well then your returns will not be as great. 
  • There are normally fees included when withdrawing any of your cash value or if you decided to terminate your policy. 

How do I know if universal life insurance is right for me? 

Choosing any kind of life insurance will be dependent on your own personal circumstances. Whether you have dependants that rely on your income and whether you currently have a mortgage on your home are always two important factors that you need to take into account.

You will also need to think about how much cover you want, how long you want this cover for and also what your monthly budget for premiums are.

Universal life insurance may be the right option for you if you want to grow your savings at the same time as protecting your family in the event of your death.

If you are still unsure of which type of life insurance is the best fit for you then speaking to a qualified life insurance broker may help. Not only can they advise you based on their expertise and your circumstances but they can also compare prices from different insurers, helping you to find the perfect cover for you and your family.  

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