To answer some of your questions about universal life insurance, we talked to the life product services team at Auto-Owners Insurance.
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What is universal life insurance?
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Who is eligible for it?
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Who might benefit from universal life insurance?
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What are some advantages of universal life insurance?
What is universal life insurance?
Universal life insurance is a permanent life insurance contract that offers an incredible amount of flexibility and peace of mind. This type of policy follows you through all of the changes that can happen in life. It is not tied to any specific pay schedule, so if you need to skip a payment or pay less or more, you can.
So, what makes the flexibility of universal life insurance possible?
There are two distinct components to universal life insurance: the death benefit and the cash value.
Cash value: fund that earns an interest rate
Part of the premium payment is used to protect the death benefit. This could include the cost of insurance, the payment fee, the administrative fee, and any applicable taxes. The remainder of your
premium is left in the cash value fund, which earns interest. If you don’t pay your premium, the cost of maintaining the death benefit is subtracted from the policy’s cash value.
Think about it like driving a car.
The car would be the death benefit and the gas tank would be the cash value fund. You can fill the gas tank up all the way or you can fill it up as you need it. But you always need enough gas (cash value) to keep the car (death benefit) going.
Who is eligible for universal life insurance?
Individuals age 15 days to 75 years are eligible for this type of policy.
Who might benefit from universal life insurance?
Universal life insurance can be great for new families. New families are often on a tighter budget or things can come up like medical bills or needed house repairs. So, if they need to make a partial payment or skip a payment, universal life insurance allows them that flexibility.
It’s also beneficial for those who are financially savvy. Universal life products require proper maintenance and funding, so it’s best for those who want to actively monitor their account. However, others may not believe this would be an advantage to them; it simply depends on how you prefer to manage your life and finances. For example, if the interest rate goes down, you may want to pay more in premium to make sure that the policy is properly funded.
On the other hand, if the interest rate goes up, you may be able to pay less. So, if you’re already paying attention to interest rate changes and enjoy being involved, universal life insurance might be for you.
What are some advantages of universal life insurance?
If you were to get universal life insurance while you’re single, then later get married and have children, we are able to adjust your coverages to meet your changing needs, such as adding the Children’s Term rider and other applicable coverages. This is a great advantage to universal life insurance.
One of the biggest reasons people get universal life insurance is for debt protection. Let’s say you buy a home or vehicle. If you were to pass away, this life insurance would allow your loved ones use the funds from the death benefit to help cover these costs.
Universal life insurance can also target cash value build up. Upon expiration of a 10 to 20-year term policy, we often hear that people want us to offer “return of premium,” meaning they receive all of their premiums back if they outlived their term. With a universal life policy, the owned premium for a certain length of time can be set with the target of accumulating cash value equal to the premium paid in that time.
While this is not a true return of premium, the accumulated cash value may offset some or all of the premiums paid if you live past the target date…which is the whole point!
There! Now the next time you hear someone talking about universal life insurance, you’ll know exactly what they mean.
