Life insurance gives parents and spouses the peace of mind that their loved ones will be taken care of in the event of their unexpected death. It is designed to pay out a death benefit to your beneficiaries to help cover mortgage or rent payments, childcare, and other monthly expenses. It can also be designated to pay for a child’s future education. For some families, the proceeds from a life insurance payout may be the only source of income that they have. Without having a life insurance policy in place, your family can endure extreme financial hardship.

With so many life insurance products available today, how do you know which one is best for you and your family? Below we discuss a popular product known as universal life insurance.

What Is Universal Life Insurance?

A universal life insurance policy provides a payout to your beneficiaries upon your death. A universal life policy is considered to be a type of permanent coverage as it can last until your death, based on the maturity age that you choose. Premiums must be paid in to keep the policy in effect.

As a policyholder, you decide how much coverage your family needs. This is often based upon how much debt you have, such as a mortgage or loan, as well as what your family needs to cover monthly expenses like food and utilities. Premiums are based upon the amount of coverage that you choose. Your age, gender, health history, and lifestyle will impact how much you pay for universal life insurance coverage.

To get a universal life insurance policy, you will be required to complete a medical exam. You will pay more money in premiums for a universal life policy than what you would pay for term-life insurance, but less than a whole-life policy. Universal life insurance policies are similar to whole life insurance plans as they include both a term life insurance plan and a cash value. The cash value portion, which is similar to a savings account, comes from a portion of the premium that you pay each month. Universal plans offer more flexibility and lower premium payments than a whole-life policy.

How do universal life insurance policies work?

When you pay your premium under a universal life insurance policy, it is broken up between the cost to keep the insurance and the amount that goes into savings. The savings account, also known as the cash value, will earn interest. As the cash value builds up over time, you can withdraw or borrow against this.

In a universal life insurance plan, the death benefit paid out is limited to the policy value. Any excess cash value at your death is kept by the insurance company. If a loan was taken out against the cash value that is still outstanding at the policy holder’s death, this will be deducted from the death benefits that are due to your beneficiaries.

Universal life insurance policies offer more flexibility in premium payments than other policies. As long as you cover the insurance portion of your payment, you can pretty much pay in whatever you like. Many people use this flexibility to pay in higher amounts early on so that they can build up their cash value quicker. If you run into financial hardship, you can pay in just the insurance portion. You can also use the cash value to fund your payments if there is enough available.

Another feature of a universal life insurance policy is the ability to change the death benefit to correspond with changes in your life. Many people decrease the benefit as they get older and pay-off their mortgages or they may increase it as they have children or purchase a home. To increase your benefit, you may be required to undergo a medical exam.

Should you buy a universal life insurance policy?

Universal life insurance policies are popular plans due to their flexibility. You can build up a cash value that can be used at a later date or can fund your life insurance policy as you reach retirement or go through financial hardship. You can modify the death benefit based on where you are in life. Paying off a mortgage, buying a new home, retiring, or having more kids can impact the amount of death benefit that we may need.

Universal life insurance policies are a good option if you are looking for a plan that builds up a cash value and offers flexibility. You can change the death benefit or modify how much you pay in each month toward your premiums. If you are looking strictly for a plan that provides death benefits while you are raising your family and nothing else, a term-life policy would be your best bet. Premiums are cheaper and the policy payout can be essentially the same.