What is Universal Life Insurance?

Life insurance can help solve for many financial needs. But you may be unsure as to what kind of life insurance might be right for you. When shopping around for options, universal life insurance is one of many insurance choices to think over.

Universal life insurance is a form of permanent life insurance. In the insurance industry, it is often referred to simply as “UL” or “UL insurance.” In exchange for paid premiums, the insurance company assures a death benefit to be paid out should the policyholder die. Like other permanent insurance options, universal life insurance comes with a cash value component. The cash value has the potential to grow over time.

Generally speaking, universal life insurance comes with flexible premiums. You may be able to adjust how much you will pay in premium costs each year. However, minimum premium amounts must be covered or the universal life policy will lapse. But so long as the policy stays in force, it will provide lifelong coverage, just as with whole life insurance.

Let’s get more into the basics of universal life insurance, its potential benefits, and its possible uses in a financial plan.

What is Universal Life Insurance?

Universal life insurance was created as an alternative to whole life insurance. This was for the goal of giving consumers more flexibility than whole life policies do. Universal life insurance comes with two components: an insurance part and a wealth-building part.

When premiums are paid, part of them goes toward the insurance part of the policy, covering costs associated with having insurance. This part includes a preset amount to be paid out as the death benefit. Other portions of the premium payments go into the wealth-building part, which is the cash value.  The cost of insurance must be covered so the policy stays effective, but you may be able to adjust premiums, over time, as your needs change.

Under IRS tax law, the UL policy's cash value grows tax-deferred. Upon the cash value growing to a suitable level, you may take withdrawals from it or borrow against it.