Legal Definitions - universal life insurance

Universal life insurance is a type of permanent life insurance designed to provide coverage for the entire lifetime of the insured individual, provided premiums are paid. It is distinguished by its significant flexibility regarding premium payments, death benefits, and a savings component known as cash value.

Key characteristics of universal life insurance include:

• Flexible Premiums: Policyholders can often adjust the amount and timing of their premium payments, sometimes even skipping payments if the policy's cash value is sufficient to cover the costs.
• Flexible Death Benefits: The payout to beneficiaries upon the insured's death can sometimes be adjusted over time, within certain policy limits.
• Cash Value Component: A portion of each premium payment contributes to a cash value account that grows on a tax-deferred basis. This cash value can be accessed by the policyholder through loans or withdrawals, or by surrendering the policy for its accumulated value.

While offering considerable adaptability, universal life insurance typically involves variable investment returns for the cash value and potentially changing premium requirements. Unlike some other permanent life insurance policies, there isn't always a guaranteed rate of return on the cash value or a fixed payment schedule. This structure can offer the potential for higher cash value growth but also carries more risk, as insufficient payments or poor investment performance could lead to the policy lapsing if the cash value is depleted.

Here are some examples illustrating how universal life insurance works:

• Example 1: Adapting to Changing Financial Circumstances

  Maria, a freelance graphic designer, purchases a universal life insurance policy to ensure her family is protected. Her income fluctuates from month to month. With her universal life policy, she can pay a higher premium during prosperous months to build up her cash value, and then pay a lower premium or even skip a payment during leaner periods, relying on the accumulated cash value to cover the policy's costs. This demonstrates the policy's flexible premium feature, allowing her to manage payments according to her variable income.

• Example 2: Leveraging Cash Value for Education Costs

  David and Sarah have held a universal life policy for over two decades, steadily building up a substantial cash value. When their eldest child is accepted into college, they realize they need additional funds for tuition. Instead of taking out a traditional loan or withdrawing from their retirement savings, they decide to take a loan against the cash value of their universal life policy. This illustrates how the cash value component can serve as a flexible financial resource, allowing them to access funds for significant life events while keeping their insurance coverage intact (though the death benefit would be reduced by any outstanding loan amount).

• Example 3: Adjusting Coverage as Life Stages Evolve

  When Mark and Lisa first bought their universal life policy, they opted for a high death benefit to provide maximum protection for their young children and mortgage. Years later, their children are grown and financially independent, and their mortgage is paid off. They decide to reduce the death benefit on their policy. This adjustment allows them to either lower their ongoing premium payments or direct more of their payments towards the cash value, reflecting the policy's ability to offer flexible death benefits that can be tailored to evolving family needs and financial goals.