how universal life ul insurance works
ul insurance provides more flexibility than whole life insurance policyholders can adjust their premiums and death benefits ul insurance premiums consist of two components a cost of insurance coi amount and a saving component known as the cash value 2as the name implies the coi is the minimum amount of a premium payment required to keep the policy active it consists of several items rolled together into one payment coi includes the charges for mortality policy administration and other directly associated expenses to keep the life insurance policy in force coi will vary by policy based on the policyholder s age insurability and the insured risk amount collected premiums in excess of the cost of ul insurance accumulate within the cash value portion of the policy over time the cost of insurance will increase as the insured ages however if sufficient the accumulated cash value will cover the increases in the coi ellen lindner investopediaadvantages and disadvantages of universal life insuranceflexible premiumspossible flexible death benefitpotential cash value growthallows policy loansrisk of large payment requirements or policy lapsereturns are not guaranteedsome withdrawals are taxedcash value lost at policyholder s deathpros explainedunlike whole life insurance policies which have fixed premiums over the life of the policy a ul insurance policy generally has flexible premiums within limits policyholders can make payments that are more than the coi the excess premium is added to the cash value and accumulates interest alternatively if there is enough cash value policyholders may lower or skip payments without the threat of a policy lapse 3your policy may allow you to increase the size of your death benefit although that may require a medical exam you may also be able to lower your death benefit to lower your premiums 4like all permanent life insurance a ul insurance policy can accumulate cash value in something like a savings account the cash value earns interest based on the current market or the policy s minimum interest rate whichever is greater as it accumulates policyholders may take out a portion of the cash value in the form of partial withdrawals or loans universal life policyholders may borrow against the accumulated cash value without tax implications the interest rates on these loans are often lower than rates available for a personal loan and they don t require a credit check however unpaid loans will reduce the death benefit by the outstanding amount 5cons explainedwhile the ability to lower your premiums and to make withdrawals in times of need help make universal life a very flexible insurance type you have to watch your account carefully if your cash value falls to zero and your premiums don t cover the cost of insurance then your policy can lapse 1if interest rates drop your cash value may not perform well unlike whole life universal life cash value does not earn a guaranteed rate however most ul policies come with a minimum rate so that your losses are limited 