Universal Life Insurance
Gain more control and flexibility over your life insurance policy. Read our guide on universal life insurance to learn how you could benefit.
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Universal Life Insurance
Universal life insurance is unlike any other insurance product on the market.
It offers lifetime coverage, high death benefits and a savings component that can benefit you while you are still alive. It also provides unparalleled control and flexibility.
This guide provides a complete overview of universal life insurance. We will look at the benefits, how universal life insurance works and other essential information on the product.
What is universal life insurance?
Like whole of life cover, universal life insurance is a type of permanent life insurance. This means a policy provides lifelong coverage.
Universal life policies offer a death benefit and cash value savings component. This means some premium payments are allocated to the cash value component.
The death benefit guarantees how much will be paid to your beneficiaries when you die. Meanwhile, the savings component accumulates cash value over time.
The potential cash value growth is one of the main selling points of universal life cover as it grows tax-free. Wealthy individuals may also be able to use a policy to reduce their taxable income.
What separates universal life insurance from whole of life coverage is its flexibility. Policyholders can adjust the annual premium payments and death benefit amounts within certain limits.
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How does universal life insurance work?
With a universal life insurance policy, premium costs are split between:
- The cost of insurance
- The cash value component
There are also some additional policy charges to consider.
The cost of insurance (COI) is the minimum premium amount needed to keep the policy active. The COI covers the benefit and administrative charges.
Surplus monthly premiums above the COI amount are added to the cash value portion of the policy. You can also pay additional premiums to increase the cash value amounts further.
Be aware that there are often limits. It is best to check with the insurance provider to find out more.
The cash value can earn interest and grow over time. The rate of return can vary as its growth is often tied to stock market performance.
However, there is usually a zero floor in place. This means your cash value balance can never fall due to a stock market crash or downturn.
Types of universal life insurance
While there are various policy types on the market, the three most common types are:
- Indexed universal life insurance
- Variable universal life insurance
- Stocks and shares
- Bonds
- Mutual funds
- Guaranteed universal life insurance
An indexed universal life (IUL) has an investment component. The cash value is linked to the performance of an underlying index, such as the S&P 500.
With this type of policy, there is usually a cap in place. This is the maximum return you get regardless of the index's performance. So, if the cap is 10% and the market goes up 15%, your returns would remain capped at 10%.
With this type of policy, the cash value can be invested in various investment options, such as:
With this option, the investment risk is typically higher than other universal life insurance policies.
These are sometimes known as fixed universal life insurance. They offer a fixed interest rate on the cash value component. Interest is typically earned at a modest rate set by the provider.
The benefits of universal life insurance
Some of the main benefits of universal life insurance include:
- Lifelong coverage
- Flexibility
- Cash value growth
- Tax benefits
- Estate planning
Unlike term life insurance, policies provide lifetime protection for the policyholder as long as the minimum premium payments are maintained.
Universal life insurance provides flexible premiums and adjustable death benefits. This means the policy can be customised to meet your financial goals and needs.
Be aware that you can only add additional death benefits if you take that option from the outset.
The cash value component can grow tax-free over time. Money can be taken from the cash value in the form of loans and withdrawals.
As the policy can provide a source of income, it can be used as part of your retirement planning strategy.
Universal life insurance policies offer various tax benefits, such as tax-deferred asset accumulation. This means you won't owe taxes on current earnings or interest.
Like trusts, universal life insurance options provide a tax-efficient way to transfer wealth to beneficiaries. As a result, they can be used as part of your broader estate planning strategy.
Universal life insurance and QNUPS
As discussed, universal life policies combine a death benefit and a cash value component.
The cash value portion of the policy is not liable for Capital Gains tax. But while the cash component grows tax-free, it is treated as taxable income when you start drawing money from it.
How much income tax you pay is based on the country’s tax laws where you are a resident. However, it is possible for current or returning UK residents to reduce their tax bill by using a QNUPS.
By transferring a universal life insurance policy into a QNUPS, 25% of the income withdrawn from the cash value savings component of the policy is tax-free.
For example, if you took out $200,000, $50,000 would be tax-free, while tax would only apply to the remaining $150,000.
As well as reducing your taxable income on withdrawals, the policy would also be exempt from UK Inheritance Tax (IHT) as long as it is in a QNUPS. This can result in significant tax savings.
Get the cover you need with Holborn Assets
A universal life insurance policy gives you the coverage you need with added control and flexibility. They can also act as an effective wealth protection tool for high-net-worth individuals.
But with so many different types of policies available, knowing which is right for you can be challenging.
Working with a financial professional is the best way to ensure you have the right life coverage. Speak to one of our experienced financial advisers to get started.
Holborn Asia is a market leader, offering independent, professional advice and wealth management solutions.
We work with some of the top international insurance companies, allowing us to offer a range of expat insurance products to suit your needs.
We are part of the wider Holborn Assets Group, a leading, award-winning financial advisory company with over $2 billion in assets under management (AUM).
Book a free, no-obligation meeting today to learn how we can help you.
Frequently Asked Questions
Universal life insurance is a type of permanent life insurance that provides a death benefit to beneficiaries upon the insured's death. It also offers a cash value component that earns interest over time. Policies provide flexibility in premiums and death benefits. This allows policyholders to adjust their coverage and payments as needed.
