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What Is Universal Life Insurance and How Does It Work?

Life insurance comes in many different varieties, but one that you may be particularly interested in is universal life insurance. They’re known as a flexible kind of policy with plenty of advantages for those who know how to best maximize their potential.

Universal life insurance provides you with lifelong coverage, along with options for how the cash value of your policy should be invested. That cash value even has the potential to grow, in certain circumstances. If you’re interested in learning more about what these policies are and how they work, read ahead as we dive into some of the details.

Universal Life Insurance Basics

In a nutshell, universal life insurance is a kind of permanent life insurance policy, meaning it lasts from the time you purchase the policy all the way up until the time of your death (as long as you keep paying those premiums) and provides a death benefit and cash value (which you might think of as a kind of savings to access).

Something that distinguishes universal life, though, is the fact that it doesn’t have a set premium. As the policy holder, you have the option of paying whatever they choose, as long as it falls within the minimum and maximum limits set by the policy’s provisions. These minimums and maximums are variable, depending on the individual, and take factors such as age, sex, medical history, and coverage amounts into consideration.

The Components of Universal Life Insurance

Universal life insurance policies may have variance between them, but all will consist of the following three components:

  • The Premium: This is the money you pay into the policy. It covers the cost of insurance, and any amount you pay above your minimum goes into your cash value.
  • Cash Value: This is your savings and investment component. It can be credited with interest or gains earned from investments.
  • A Death Benefit: As with other policies, the death benefit is what goes to your beneficiaries if you are to pass away.

Keep in mind that your cash value will grow according to a minimum annual interest rate, but is also susceptible to changes in growth rate depending on how your insurer’s investments go. This means that when you’re shopping for universal life policies, you should stay aware of the differences between the minimum returns that policy will see and the projected performance that your insurer expects.

These and other factors are ones you should surely consider, but it may be the case that universal life is a solid choice for your circumstances. Be sure to do your research, compare what’s available, and weigh your options before making that final decision.