With almost everything around us experiencing rapid inflation, it is critical to have a financial cushion regardless of your earning millions in a month. If you are the sole breadwinner for your family, having significant funds in your bank account becomes even more critical. It not only helps in financial crises but shields your family when you are not around. However, savings alone may not be enough to assist your dear ones in an unfortunate event; this is where life insurance products come into play. The two most common types of life insurance products are– term life and universal life insurance. The former pays out only if the policyholder dies during the policy's term. Furthermore, it has no cash value. But what exactly does the latter entail? Let us shed some light on this.

What is Universal Life Insurance?

Universal life insurance, also known as cash value insurance, is a policy that continues till your life upon the premium payment. In this scheme, a portion of your premium is parked in a savings account, where interest accumulates. Deposit interest rates are subject to change based on market conditions. As interest rates rise, so do the cash value and death benefit.

Universal life cover is also referred to as Jumbo insurance in Dubai. The reason is this insurance product is specifically designed to help high-net-worth individuals.

How does Universal Life Insurance works?

Universal life insurance is a financial product ideal for high-net-worth individuals, particularly those seeking consistent income, estate planning, or gaining market exposure by eliminating downside risk.

The premium for this insurance is split into two parts. The premium for this insurance is split into two parts. One is used as an investment, while the other is used to provide a death benefit. The policy allows you to select the premium you want to pay. Anything over the required premium will be automatically transferred to the savings account.

Let's take a real-life example of this.

Suppose Mr X is in his 40s and has two children. He is concerned about his children's future and wants to ensure that his children will have financial support even if something happens to him. He decides to purchase a universal life insurance policy with a death benefit of 1 million USD each.

He chooses to pay a premium of 500 USD per month for the policy. This premium payment is split between the death benefit and the policy's cash value component. The cash value component earns interest, and he can adjust the premium and death benefit within certain limits.

What are the different types of Universal Life Insurance?

Universal life insurance is of the following four types–

• Guaranteed Insurance: In this scheme, the interest rate on the investment portion does not fluctuate in response to market events. The premium also stays the same throughout the policy life. Guaranteed universal life insurance carries little risk and allows you to accumulate wealth without worry.
• Indexed Universal Insurance: Indexed Universal Life Insurance (IUL) is a type of permanent life insurance that combines features of traditional universal life insurance with the potential for growth based on the performance of a stock market index, such as the S&P 500. The cash value component of IUL policies is linked to the performance of a stock market index.
• Variable Universal Insurance: This plan provides life insurance and invests a portion of your premium in a mutual funds, bonds, and stocks. Here, the market movement has a significant impact on the policy’s cash value .
• Adjustable Universal: This type of policy allows for more flexibility in terms of both premium payments and death benefits. You can adjust the premium and death benefit within certain limits, and the cash value component is typically higher and can fluctuate with market conditions.

What are the advantages of Universal Life Insurance? - It protects family legacy

• Downside protection The market is volatile, as are the global indices that fluctuate in response to it. If you invest in a scheme with market-linked returns, the risk of capital loss is always present. However, because of the cumulative guarantee feature of universal life insurance, your capital is protected against unfavourable market movements.
• Estate planning Universal life insurance serves as a tool to manage the transfer of assets to one's beneficiaries after death. It enables policyholders to build wealth in their insurance policies and use it to pay for expenses such as estate taxes, legal fees, and other debts. Policyholders can modify coverage and premiums to meet changing needs and financial circumstances. It ensures that the policyholder's assets are distributed per their wishes.
• Flexibility You can modify your premium payments and death benefits within specific limits, which allows you to adapt the policy to your changing needs and financial situation.
• Cash value accumulation The policy allows you to accumulate cash value over time. You can use this cash value to borrow against, or even use it as a source of retirement income.
• Permanent coverage It provides coverage for the policyholder's entire lifetime as long as the policy remains in force and the premiums are paid. Unlike term life insurance, which provides coverage for a specified term, ULI provides coverage that lasts for the policyholder's entire lifetime, making it a more attractive option for those who want to ensure that their beneficiaries will receive a death benefit regardless of when they pass away.
• Investment component The investment portion of a universal life insurance policy allows you to participate in the market performance and potentially earn higher returns than traditional savings accounts.
• Tax advantages Universal life insurance policies present tax advantages, such as tax-free death benefits and deductions up to a certain limit on the premium.

What are the disadvantages of Universal Life Insurance?

• USD 1 million starting cover
  The policy does not provide coverage for small amounts, and the minimum coverage is USD 1 million. It means that if you already have insurance and want to supplement it with another policy, universal life insurance may not be the best option for you.
• Not suitable for all
  Universal life insurance is not appropriate if you need coverage for a specific period. Rather, you should buy term life insurance.

Living benefits of Universal Life Insurance

1. Loan benefit

   Universal indexed life insurance allows policyholders to obtain only interest loans. It means you only have to pay interest on your borrowing, and the lender will recover the principal disbursement from the insurance cash value. The benefit of obtaining a loan under this policy is that the lender does not report this loan to credit bureaus, and any payment default will not affect your credibility.
   In the unfortunate event of death, the lender recovers the debt from the policy's death benefits.

2. Withdrawal benefits

   You are not liable to pay any tax if the withdrawn amount does not exceed the total premium payment you made on universal life insurance. You can also make a tax-free withdrawal by availing loan against the policy offered by your insurer. However, you need to keep two crucial points in mind here. Withdrawals lower the death benefits, and it also comes with several costs.

3. Collateral assignment

   A collateral assignment is a universal life insurance policy feature that allows the policyholder to use the death benefit as collateral for a loan. The loan is secured by the death benefit, which means that if you default on the loan, the lender can use the death benefit to pay off the loan.

Hat Tip

Universal life insurance is a type of permanent life insurance that provides policyholders with flexibility and options. It allows policyholders to adjust their death benefit or premium payments. It also includes a cash value component that can grow over time.