Universal life insurance policies offer more flexibility than whole life insurance policies in terms of flexible death benefits, premiums and investment choices. Universal life insurance is comprised of two parts: cost of insurance and a saving component or cash value.
Cost of insurance is the minimum premium to be paid to keep the policy active. Cost of insurance varies from policy to policy depending on the policy owner’s age, insurability and the risk amount insured. This cost of insurance increases as the policy owner ages.
In universal life insurance plans, policy owners decide how funds in the savings component are invested. Multiple options are available depending on the insurance company ranging from savings accounts to market based portfolios.
Whether or not a medical exam will be required will depend on your age, health status and the amount of insurance you are applying for. Insurance companies examine the policy owner’s application and use “full medical underwriting” to rule out any medical history that could be detrimental to the company in the future. The insurance agent will verify the policy owner’s information and may also require applicants to take a life insurance medical exam.
The medical exam consists of checking height, weight, blood pressure, urine and potentially blood samples in order to rule out any medical history that could negatively impact the insurance company.
This type of test is generally completed by a paramedical professional hired by the insurance company and may be performed in your home. The result of the medical test can be used in determining the pricing policies, individual health and life application as well as motor vehicle record. The insurance company may even cross-reference the policy owner’s medical records.
If you plan to make a partial withdrawal from a universal life insurance policy at any time, the cash value as well as the death benefit may be will be impacted. Some policies have a minimum withdrawal of $500 and a maximum withdrawal dependent on the type of policy. The policy owner will have to pay income tax on any withdrawals from the policy, unless the adjusted cost basis is higher than the cash value.
There is also the opportunity to use cash value as collateral. For universal life policies, financial institutions that lend against insurance cash values will generally lend up to 50 percent of the cash value for leveraging purposes. The policy owner has the flexibility to repay the loan at any time. Cash value continues to grow if the invested money is untouched.
Upon cancellation of the universal life insurance policy, the cash surrender value is received by the policy owner. During the early years of a policy there may be a penalty for cancelling called a surrender charge. Some policies have no surrender charge. The policy owner may have to pay income tax on the amount received in the year the policy is cancelled.
The amount of insurance coverage one needs is depenent on a number of factors. Often times permanent insurance, such as universal life, is purchased to protect the value of your estate for loved ones by providing liquid capital to pay tax liabilities on assets that have grown significantly in value, like a recreational property or a business. Universal Life insurance can also be used for estate equalization purposes, or to meet charitable intentions. When considering a universal life insurance policy, keep in mind your household income, net worth, income replacement needs, estate liquidity needs (taxes and final expenses), and outstanding debt before choosing an insurance policy. Try our free, easy-to-use insurance calculator here.
There are several variables that determine the cost of your policy. Here are a few of the main factors:
- Age: Since universal life insurance covers you for a lifetime, the premium amount increases as the policy owner ages. For instance, if you choose to be covered until 75 years of age, the premium would be less than if you chose to be covered until age 90.
- Health: The policy premium will depend on the owner’s medical family history; chronic diseases and lifestyle can potentially increase costs. A medical underwriting exam is also required by some insurance companies before approving the policy.
- Gender: On average, women typically live longer than men, so insurance may be less expensive for women.
- High Risk Behaviours: The insurance policy premium may be higher if the policy owner has a dangerous or life-threatening job or high risk hobbies such as sky diving.