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Universal life insurance is another type of permanent life insurance. It is similar to whole life in many ways, but offers greater flexibility. You can increase or decrease the death benefit and the cash value after you take the policy out if your needs change. The premiums will go up or down accordingly. Increasing the death benefit requires you to pass medical underwriting; decreasing the death benefit may result in surrender charges. The cash value earns interest based on the performance of investments chosen by the insurance company. This type of insurance also offers flexibility in the timing of premium payments.
Universal life is even more complicated than whole life and can also be more expensive. Also, these policies can become underfunded over time because the interest the cash value earns isn’t always enough to cover its sometimes rapidly increasing premiums. If a policy becomes underfunded, you have to pay extra to keep it in force. Otherwise, the policy will lapse. Universal life insurance also has expensive administrative and management fees that come out of your premiums. Because of its complexity and cost, universal life is not recommended for most consumers. However, as with other types of permanent life insurance, the ability to borrow against the policy’s cash value at low interest rates and without a credit check is an attractive feature for some consumers. (For related reading, and Is Life Insurance a Smart Investment?)
Guaranteed Universal Life
Guaranteed universal life insurance offers coverage until age 90, 95 or even until your death but is less expensive than whole life insurance or universal life insurance. It doesn’t have a cash value or investment component, or the accompanying management fees, and the premiums can be paid as level premiums for a lifetime or for a shorter term, similar to whole life insurance. Unlike regular universal life insurance, the policy is not at risk of becoming underfunded and requiring additional premiums to remain in force. This type of policy can be appealing to seniors who still need coverage; it can be cheaper and provide better protection than term life insurance in that situation. The policy has a guaranteed death benefit in amount you select when you take out the policy. Some guaranteed universal life policies are at risk of lapsing if the policyholder misses a premium payment; other policies are no-lapse policies and do not carry this risk. It is a relatively simple product and can be a good alternative to term life insurance for individuals that want permanent coverage.