Universal life insurance was introduced in the early 1980’s as a cheaper alternative to whole life insurance. (UL) provides permanent protection and is more flexible than whole life. Sometimes called, “Flexible Premium Adjustable Life”, UL lets you adjust the face amount as your needs change and allows you to choose how much and when you would like to pay.

Like Whole Life insurance, UL offers a savings of cash value that grows tax deferred. Most UL policies pay a minimum interest rate such as 3 or 4%.  Just like in a whole life policy, the company assumes the risk in a UL policy because they guarantee a certain minimum return on your investment. Most whole life and UL ledgers or illustrations that are presented to a prospective policy holder will show two different columns, a guaranteed column and a non-guaranteed column.

If the insurance company’s investments do well in a particular year, then the interest rate paid on the cash value will increase. The policy will at least perform at the rate that the guaranteed column illustrates but hopefully the insurance company will have a good return on their investments and will credit a higher amount of interest which will perform more closely to what the non-guaranteed column illustrates.

UL policies offer two different death benefit options. Option A will pay the face amount only. Since cash value will have accumulated within the policy, the insurance company does not have a high amount of risk and therefore, Option A is less expensive. Option B will pay the face amount plus the cash value that has accumulated. Option B makes the insurance company assume a higher amount of risk and therefore is more expensive. Most UL policies offer what is known as a “secondary guarantee” which means the policy will not lapse regardless of the performance of the policy as long as you pay the minimum designated premium.

The reason that a UL policy is cheaper than a whole life policy is that the minimum premium required to keep the policy in-force until age 100 or 120 does not allow for much cash value growth. Just as paying more than the minimum premiums due on a credit card statement is necessary for quickly eliminating debt, paying more than the minimum premium in a UL policy is necessary to build a significant amount of cash value.

Universal Life Does:  

• Offer Premium and face amount flexibility
• Build cash value that is tax deferred
• Allow you to borrow from cash value

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Universal Life Does Not:

• Allow you to manage the investments