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What is universal life insurance?


With a name like that, you might think you’re getting a policy that pays out no matter what planet you’re on when you meet your demise, but that’s not quite right. Universal life insurance is a type of coverage that pays some benefits to policyholders while they are still alive rather than just to their heirs upon death. As premiums are paid, the value of a policy can exceed the amount that the insurance provider needs to cover the death benefit. It’s this extra amount that policyholders can withdraw, often free of any tax liability.
The accrual of value beyond the death benefit makes universal life insurance sort of a cross between conventional whole life policies and investment vehicles like mutual funds. But do you really want that? Life insurance can be quite complicated, opaque and hard to fathom, even in its simplest form. Universal life policies add a layer of complexity that could make them more trouble than they’re worth – if you can figure out what they’re worth at all. Certain universal life policies, in fact, are structured in a way that offers flexibility in the premiums that the policyholder pays, as well as in the value of the death benefit. That can provide another potential source of head-scratching. If you’ve got an insurance agent that you trust and that recommends universal life, then by all means listen to the case that he or she makes, but be cautious and ask a lot of questions. If you’re looking to buy life insurance and also to make an investment, one-stop shopping may not be the way to go.
-Conrad de Aenlle