Universal life insurance is just one type of life insurance policy that you can get from a life insurance company today. Unlike term life insurance or mortgage (reducing) life insurance, universal life insurance gives your policy a cash-in value. This means you can take money out of your policy whenever you need it.
This flexible approach to life insurance is very popular in the US and offers a real alternative to standard term and mortgage life policies, where the policyholder usually doesn't get to use the life insurance money directly unless they are diagnosed with a terminal illness. Universal life insurance also lets policyholders earn interest on their life insurance premiums, which is not possible with a standard life insurance policy.
What happens with universal life insurance
Universal life insurance works a lot like a long-term deposit account with a high interest rate. When a payment for an insurance premium is sent to a life insurance company, the money is put into an interest account after a small fee is taken out to cover costs. The money then earns interest, and the interest is added to the account every month. Each premium payment, of course, adds to the fund, and the account earns interest that grows each month. The monthly cost of maintaining the insurance product or products bought through the universal insurance plan is also taken out of the universal account.
If the owner of a universal life insurance policy wants to take money out of it, they can do so from the cash surrender value of the policy. Most of the time, withdrawals are limited to a certain number per year. Depending on the policy provider, there may also be limits on how much money a universal life policyholder can take out and a minimum amount of money that needs to stay in the account.
It should go without saying that taking money out of a universal life insurance policy will lower the total amount of money available when a lump sum claim is made for death or a terminal illness. It is important to take care of the universal life account so that your family and other people who depend on you will have enough coverage if you die. If you don't have the time to carefully manage a universal life product, you may not have much to show for your life insurance premiums when a lump sum payout is made.
