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Universal Life Insurance

What it protects against

Financial loss to beneficiaries due to death of insured.

How it works

Unlike owners of whole life, owners of universal life bear the risks and reap the rewards of changing interest rates. If rates are high, more is credited to the policy, cash values rise, and owners may be able to skip premium payments for many years. But if rates decline, owners may have to pay more each year than they anticipated when they bought the policy, just to keep it in force. Insurers guarantee crediting rates will never go below a specified level, however. Universal life also provides owners the option of reducing death benefit or, subject to evidence of insurability, increasing it. Cash values may be accessed by loans or withdrawals. Most policies offer a choice of two death-benefit options: the face amount, or the face amount plus cash value. Policies insuring two people pay on the death of the first or the second.

Who needs it

People who need to protect their incomes during working years and who expect to need coverage later in life. People also buy UL and other permanent insurance to help in estate planning. The death benefit is free of income tax, and it provides a source of immediate liquidity. UL can be used to fund supplemental executive retirement plans and business continuation plans.

Who may not need it

Anyone who may not need life insurance, such as a single person with no dependents. Also, people who do not expect to need insurance as they become older or who can satisfy their coverage needs through less-expensive term insurance.

When to buy it

Permanent insurance is best purchased early in life, when annual premiums are lower. However, older buyers may find it highly effective for estate planning.

How to pay for it

Single premium, scheduled premiums or unscheduled premiums.


Terms to Know

  • Grace Period  (View Definition )
  • Guaranty Association  (View Definition )
  • Policy or Sales Illustration  (View Definition )