Universal life insurance is a type of permanent life insurance that offers more flexibility than whole life. You can adjust your premium payments and death benefit amount within certain limits, making it adaptable to changing financial circumstances.
This flexibility comes with both advantages and risks that you should understand before purchasing.
How Flexibility Works
With universal life, you can increase or decrease your premium payments as your financial situation changes. If you have a good year, you can pay more to build cash value faster. In tighter times, you can reduce payments as long as there’s enough cash value to cover policy costs.
You can also adjust your death benefit up or down, though increasing it may require additional underwriting.
Interest Rate Risk
The cash value in a universal life policy earns interest based on current market rates, subject to a guaranteed minimum. When interest rates are low, your cash value may grow more slowly than projected, potentially requiring higher premiums to keep the policy in force.
This interest rate sensitivity is an important risk factor to consider.
Types of Universal Life
Indexed universal life ties cash value growth to a stock market index, offering higher potential returns with some downside protection. Variable universal life lets you invest cash value in sub-accounts similar to mutual funds, with both higher potential returns and greater risk.
Each variation offers a different risk-reward profile that should match your investment tolerance and goals.