Universal life insurance is a flexible-premium, variable benefit, life insurance policy that accrues value over time. Premiums on universal life policies consist of two components. The first goes to paying for the current cost of providing insurance, while the second component is used to fund a cash value account.
The flexibility of universal life insurance allows the policyholder to vary the amount of life insurance as the need for income replacement changes. Universal life insurance policies, also known as UL policies, maintain a cash value, which can grow significantly over time.
From the premiums paid on the policy, an administrative fee and the cost of insurance is subtracted. The money left over accumulates in an account balance that earns interest. This means the effective total value of the policy will build over time. Simply stated, the value of the plan is as follows:
Total Policy Value = Insurance Value + Cash Account Balance
Generally, universal life insurance policies take one of three forms or variations thereof:
In addition to the typical benefits of life insurance, such as income replacement and burial costs, UL plans can be helpful in estate planning, deferring executive compensation, and establishing charitable trusts.
If necessary, withdrawals can be made from the cash value of the account. Because of the higher payments necessary to build account balances, universal life insurance premiums are generally higher than those of term life insurance or whole life policies.