What are the two components of a universal policy?

Universal life insurance is a type of permanent life insurance that does not expire, as long as premiums are paid. Universal life insurance has two components: cost of insurance and cash value.

Cost of insurance refers to minimum payment required to keep the policy active. Multiple variables can impact the cost of insurance, including policyholder age, insurability and risk factors. Normally, universal policies have flexible premium options, requiring either a lump sum or scheduled payments.

Each time a universal life insurance premium is paid, part of the money goes toward the cost of insurance and operational fees while the remaining funds become the interest-earning cash value, which can be withdrawn or borrowed against. A policy’s surrender value is the amount of money received should a policyholder attempt to access the cash value of a policy — essentially it is the cash value minus early termination fees.

Cash value growth for universal life insurance depends on market interest rates and the performance of the insurer. Policyholders can choose how much money is allocated toward cost of insurance and cash value as long the amounts fall between the minimum and maximum allowed. Money withdrawn or outstanding loans from the cash value will be deducted from the tax-free life insurance payout, also known as a death benefit.

A universal life insurance policy’s cash value is separate from the death benefit; beneficiaries usually will not receive the cash value unless an insurer specifically allows for it; remaining cash value will often be directed to the insurer.

Universal policies also allow for cash value to be used to pay premiums, though such a strategy is typically short term, especially if interest rates are low and cash value is limited. Additionally, universal policies can include an accelerated death benefit rider, a provision that allows policyholders to receive a portion of death benefits while still living, in the event they’re diagnosed with a terminal illness.

To learn more about universal life insurance, contact a Leliaert Insurance Agency staff member today at 574-674-0015.