Universal life insurance

Universal life insurance was introduced in the 1980s as a more flexible alternative to whole life policies. Under a universal life policy you pay a premium to the insurer and the company agrees to pay a specific death benefit to your beneficiaries. The premiums go to pay the costs of the insurance.

You have the option to pay more than this minimum premium, and the extra is deposited in your account and invested in the company’s general investment fund. Most universal life policies guarantee a minimum rate of return on the funds in your account. Returns may be higher than the minimum depending on the performance of the company’s investment portfolio.

Universal life policies allow you to change the amount and frequency of premium payments you make, and even increase or decrease the amount of insurance, as your situation changes. You can choose to increase your premiums and build up the cash value in your account more quickly. Or you can lower your premiums, and even have premiums paid from the value in your account. Of course, this will decrease the cash value, future returns, and possibly even the amount of insurance.

If the cash value of your account is sufficient, under many policies you can have future premiums paid from your account. This allows you to have the full amount of life insurance coverage without having to pay any additional premiums, as long as the value of your account remains sufficient.

You can also take tax-free loans from your account if you need additional cash. The proceeds are not taxable unless your withdrawals exceed the premiums you’ve paid into the policy. Any amount that exceeds your premiums will be taxed as ordinary income.

As mentioned, the returns on universal life policies depend on prevailing interest rates and market conditions. Universal life policies were most popular during the 1980s when interest rates and market returns were relatively high.

In the recent low interest rate environment, however, many people have been unpleasantly surprised to find the universal policies they purchased decades ago are not worth as much as they expected, or the cash values are no longer enough to cover the premiums. Additionally, universal life policies come with expenses and fees that can reduce your returns.

Before taking out a life insurance policy you should consider consulting a knowledgeable financial advisor who can review the policy and your insurance options.