When it comes to life insurance, most people only think about it in terms of buying a policy and paying a premium. They see life insurance as something that you pay for until you die. Then, family members and loved ones collect whatever the death benefit was for the policy.

In reality, however, life insurance can be used for much more than to provide a death benefit to loves ones after you die. In addition, having the right life insurance policy can mean having coverage throughout your lifetime without actually paying the same premium. Even more, the right life insurance can mean being able to adjust the death benefit of the policy during your life to meet your unique circumstances.

While it is certainly true that a discussion of life insurance can be boring and mundane for most people, it is certainly worth your time and effort to understand that not all life insurance is the same. One of the types of life insurance that is becoming more popular with buyers is called universal life insurance. The reason being that it can allow individuals to build cash value, while giving them a lot more freedom than other more traditional types of life insurance.

The purpose of this article is to explain the details of universal life insurance. However, the information is this article should not be considered an exhaustive look into this type of life insurance. Knowing exactly what type of insurance is best for your unique circumstances can only come after talking to a licensed insurance agent is familiar with your unique situation.

The Basics of Universal Life Insurance

When you purchase universal life insurance, you are actually purchasing more than just life insurance, you are also purchasing an additional savings account. The reason for this is that when a person pays premiums on a universal life insurance policy, part of the premium goes to pay for the cost of the insurance, while the other part goes into a separate account.

The money that is placed in this separate account can actually be invested as to earn more money depending on the type of universal life insurance policy that you buy. The money is this separate account grows tax-deferred, and can be used later on if you need it for personal reasons. It can also be used to actually pay the premiums of the life insurance should you be unable to pay the premiums yourself.

Universal vs. Variable Universal Life Insurance

As we mentioned earlier, depending on the type of life insurance policy you buy, the money in the separate account can grow in different ways. The reason for this is that you have two major types of policies: universal life insurance and variable universal life insurance.

Straight universal life insurance provides a fixed rate of return on the money that goes in the separate account. Currently, most companies that issue universal life insurance policies are guaranteeing about a 4% rate of growth on the funds in the separate account. Now, during times of high inflation, policy owners can make more money than the guaranteed minimum. In many ways, the money in these types of polices is almost life having a money market account.

In a variable universal life insurance policy, the funds in the separate account are tied to various investment funds. The buyers of the policy can choose how to have these funds invested. With this type of policy, the buyer can decide if they want to take safer investments to grow the separate account over time, or if they would like to take riskier investments to make more money.

Most variable universal life polices have 15 to 20 different investment options, such as stock funds, bond funds, high risk funds, and others where the money in the separate account can be invested. In addition, policy owners can actually choose which percentage of the money in the separate account goes toward their investment choices. It does not have to be an all or nothing choice.

The problem, of course, is the same as with any variable investment: you can lose money. It is up to the buyer of the policy to do their homework and ask appropriate questions to determine which investments are right for their particular circumstance.

Flexibility in a Universal Life Policy

One of the reasons that universal life insurance policies have become so popular over the last 10 to 20 years in the flexibility that they give the policy owner. For instance, the policy owner can decide that more life insurance is needed, perhaps after the birth of another child. This can be done without increasing the premium by having more of the premium going for insurance, and less going toward the separate account. Of course, the reverse can be true. After children have graduated from college, less life insurance may be needed. This could mean that the life insurance premiums remain the same, but more of it goes toward the separate account.

In addition, if you hit a period of financial instability due to the loss of a job or unplanned medical experiences, a universal life policy can help to protect against that. If you are unable to pay the premiums on your policy, you may be able to lower your premiums so that you are just paying for the insurance and not having any money going into the separate account. In addition, you may also be able to actually have the money that has accrued in the separate account pay the premiums on the life insurance until your period of financial instability is resolved.

This flexibility can be important to insure that you keep your life insurance active and in force. Many people cancel their life insurance during period when they are facing increased spending, such as during the birth of a child, because they cannot pay the premiums. It is during these periods, however, when life insurance is most important. A universal life insurance policy can help to protect against losing life insurance coverage.

Cash Withdrawals

As we stated earlier, it is possible to actually draw out the funds that have accrued in the separate account to use for higher education expenses, during times of financial instability, or for any other reason. The one drawback, however, is that most insurance companies do charge a fee for taking this money. In addition, if part of your premium is being paid from the separate account, then taking too much money can cause the premiums you pay into the policy to go up. If you are unable to pay the increased premiums of your universal life policy, then you risk having the policy canceled. In addition, any money that you take from a universal life policy will have to be paid back into the policy. Otherwise, you will lower the overall death benefit of the policy.

The Bottom-Line

For some people, they buy a universal life policy to build-up cash value, then to take it out as they get older. These people do not mind having the death benefit decreased substantially because they were using the policy almost like a savings account with the added feature of life insurance. Others, however, use it to build up a death benefit plus extra cash value to go to their loved ones with the die.

For whatever reason you may purchase a universal life insurance policy, they have great flexibility and helping power when you may need it the most. The key, however, is to talk with a licensed professional to make sure that a universal life policy and its options are what is needed for your situation.