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Universal life insurance is a form of life insurance plan that provides coverage for your whole life, similar to whole life insurance and allows you to accrue cash benefits. A part of your premium amount goes into the insurance component, while the other part goes into the cash value accumulation component. Let us take a look at what a universal life insurance plan is, how it works, and the different features of a universal life policy.
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A universal life insurance is a type of life insurance that offers whole life coverage to the policyholder along with the cash value accumulation benefits. This allows the policyholder to lead a peaceful life knowing that their family will be protected in the event of their unfortunate demise. While these plans may look similar to the whole life insurance plans, these plans offer more flexibility in terms of premiums payments and death benefits of the policy. Not only that, universal life policy allows you to withdraw cash in case of an emergency once the policy has accumulated some cash value.
Term Plans
Let us understand how universal life policy works with the help of an example:
Swati, a non-smoking female, pays flexible premiums, part of which goes towards her life insurance coverage and part into a cash value account that grows over time with interest. This cash value acts like a savings account, which Swati can borrow against if needed, giving her financial flexibility. She can also adjust her death benefit and premiums as her needs change over the years. This combination of life insurance protection and a savings component makes Universal Life Insurance a versatile choice for long-term financial planning.
Universal life insurance is similar to a whole life insurance and has the following features:
Flexible Premiums: Allows you to adjust your premium payments as needed, either increasing or decreasing them over time.
Cash Value Accumulation: Part of your premiums goes into a cash value account that grows with interest, offering tax-deferred savings.
Adjustable Death Benefit: You can increase or decrease the death benefit to match your changing life circumstances, with some policies requiring new underwriting for increases.
Access to Cash Value: You can borrow against the cash value of the policy, providing financial flexibility for unexpected needs.
Lifelong Coverage: These plans provide permanent life insurance coverage as long as premiums are paid, making it a long-term financial planning tool.
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Here is a list of the different types of universal life insurance policies:
Guaranteed Universal Life (GUL): Focuses on providing a guaranteed death benefit with lower cash value accumulation, offering stable premiums.
Indexed Universal Life (IUL): Links cash value growth to a stock market index, like the S&P 500, allowing potential for higher returns while still protecting against market losses.
Variable Universal Life (VUL): Offers investment options within the policy's cash value, allowing for potentially higher returns, but with increased risk depending on market performance.
Here is a list of benefits of buying a Universal Insurance Policy in India:
Guaranteed Death Benefits: In case of the death of the policyholder during the policy term, the nominee is guaranteed a certain amount of money, irrespective of the policy’s collected cash value. This amount can help the nominees take care of their financial needs like paying the rent, paying for the child’s fees, and paying off the remaining loans.
Flexible Premium Payments: With a universal insurance policy, you can choose suitable premium payment terms and modes as per your needs. For example, you can choose to pay the premiums in an annual, semi-annual, quarterly, or monthly mode for the regular or limited policy term or pay the premiums in a single go.
Wealth Creation Benefits: Universal insurance policy provides the policyholders a chance to create wealth for their future. This corpus buildup can help the nominees beat inflation and take care of any other financial requirements like the child’s higher education or wedding.
Loan Facility: Universal insurance policy allows customers to take out loans in case of a financial emergency, like unexpected medical bills and more.
Tax Benefits: You can claim life insurance tax benefits on the premiums paid under Sections 80C and 80D of the Income Tax Act, 1961. Not only that, your family can receive a tax-free death benefit under Section 10(10D) as per the prevailing tax laws.
There are extra fees related to these types of plans. The saving aspect of universal life insurance has some risks. Study thoroughly before buying these policies and do not buy any plan without carefully going through T&Cs.
Let us take a look at the advantages and disadvantages of a universal life policy:
| Advantages | Disadvantages |
| Flexible Premiums: Adjust payment amounts to fit your financial situation. | Complexity: Can be difficult to understand and manage. |
| Cash Value Growth: Accumulates tax-deferred savings over time. | Investment Risk: Variable options can result in losses depending on market performance. |
| Adjustable Death Benefit: Increase or decrease coverage as needed. | Higher Costs: Can be more expensive than term life insurance, especially with additional features. |
| Borrowing Capability: Access the cash value through loans if needed. | Potential for Policy Lapse: If cash value or premium payments are insufficient, the policy could lapse. |
| Lifelong Coverage: Provides permanent protection as long as premiums are paid. | Impact on Cash Value: Loans and withdrawals can reduce the cash value and death benefit. |
Note: You can use the life insurance calculator to check the applicable premiums for your profile.
Here's a comparison of Universal Life, Whole Life, and Term Insurance plans:
| Features | Universal Life Insurance | Whole Life Insurance | Term Life Insurance |
| Coverage Duration | Lifetime, with flexible premiums and coverage. | Lifetime, with fixed premiums and coverage. | Fixed term (e.g., 10, 20, 30 years). |
| Premium Flexibility | Flexible; can adjust payments within limits. | Fixed; consistent premium payments throughout. | Fixed; consistent during the term, then expires. |
| Cash Value Component | Yes, with flexible growth options and interest rates. | Yes, with guaranteed growth at a fixed rate. | No, purely for death benefit coverage. |
| Investment Options | Can include indexed or variable investment options. | None; cash value grows based on fixed rate. | None; no cash value or investment component. |
| Loan/Withdrawal Capability | Yes, you can borrow or withdraw from the cash value. | Yes, you can borrow or withdraw from the cash value. | No, since there's no cash value to access. |
| Death Benefit | Adjustable, can be increased or decreased. | Fixed, guaranteed death benefit. | Fixed, only paid if the life assured passes away during the term. |
| Cost | Generally higher than term but flexible; depends on coverage and investment options. | Generally higher due to fixed premiums and guaranteed growth. | Lower cost, especially for younger and healthier individuals. |
| Best For | Those needing flexible coverage and investment options. | Those seeking lifelong coverage with guaranteed cash value growth. | Those needing affordable, straightforward protection for a specific period |
Here is a list of factors you should consider before buying a universal insurance policy in India:
Age and Health: The premiums increase with the increasing age and decreasing health conditions of the individual. Therefore, you should consider buying universal insurance early to secure large life cover at affordable premiums.
Sum Assured: The sum assured will be payable to your family in case of your death. Thus, the life cover amount should be enough to cover your family’s needs in your absence and help them live a financially stable life.
Premiums: The premiums of your universal insurance policy should be within your budget to avoid any future lapses. A large premium amount can strain your financial conditions and lead to policy lapses.
Wealth Creation: You should always make sure that the applicable interest for the universal insurance policy’s wealth creation component is enough to meet your financial needs.
Risk Appetite: Go through the list of available funds and select the suitable fund option as per your risk appetite.
Applicable Charges: Always ensure that you read the policy documents to check the applicable charges like surrender, mortality, or fund management charges.
Customisations: You should always customise your universal insurance policy details to fit your needs, like selecting the right riders and options for the suitable premium payment and benefit payout options.
Ans. Here is a list of advantages of buying a universal insurance policy in India:
†Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by any insurer. This list of plans listed here comprise of insurance products offered by all the insurance partners of Policybazaar. For a complete list of insurers in India refer to the Insurance Regulatory and Development Authority of India website, www.irdai.gov.in
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