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What is universal life insurance and how does it work?

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Universal life insurance is a type of permanent life insurance that has the flexibility to cover a client's changing needs. With adequate funding, it can provide coverage throughout a lifetime, while providing a way to build up potential cash value. Unlike term life insurance, some types of universal life (UL) may offer a cash value option, which allows you to take money out of the contract with a withdrawal or loan.1

How does universal life insurance work?

Like other forms of life insurance, universal life pays out a benefit when you die. But what sets universal and variable universal life contracts apart is their potential for long-term cash value growth, as long as premiums are paid. The contract stays in-force as long as it has cash value.

A universal life insurance contract's cash value or accumulated value earns a minimum guaranteed interest rate. For variable universal life contracts, market fluctuations associated with your subaccounts may increase or decrease the accumulated value. Deductions then are taken from your accumulated value (or cash value) each month to pay costs associated with your contract, including cost of insurance (COI) charges. The contract's death benefit remains in-force, as long as there is sufficient cash surrender value after deductions.

Accumulated value consists of:

  • Premium payments2
  • Dividends earned3
  • Interest credited
  • Subaccount performance, VUL only4
  • Monthly deductions5

Keep in mind, any contract surrenders or withdrawals will reduce the contract's cash value.1 If you cancel the contract, you may be able to receive whatever cash value is left after any loan repayments, expenses and penalties are deducted.

What are the types of universal life insurance?

There are three main types of universal life insurance: current assumption universal life, guaranteed universal life and variable universal life. Their differences boil down to how the cash value component works:

  • Current assumption universal life (CAUL). A fixed rate product, with an interest rate that can change over time, but has a guaranteed minimum. As long as there is cash value in the contract, there is flexibility in the premium allowing you to pay more when you can or less when you need to. This product can be designed to help you accumulate cash value that can be used to supplement your retirement savings.

  • Guaranteed universal life (GUL). Although this coverage is often the least expensive type of UL, it typically has less flexibility and little to no cash value. You're primarily paying for permanent coverage, similar to whole life insurance. But on the upside, there are typically more affordable premium options with GUL contracts, depending on the death benefit you select.

  • Variable universal life (VUL). The growth of cash value is tied to subaccounts, which are similar to mutual funds and may contain investment securities, such as stocks or bonds.

What are the benefits of universal life insurance?

A universal life contract can provide multiple benefits, including flexible payments, access to cash value in the contract, a death benefit, tax advantages and the potential for permanent protection. Here's a closer look at each benefit:

  • Flexible payments. You can adjust how much and how often you make premium payments over time.

  • Cash value. You can access the available cash value in your contract, which can be useful to pay for major life expenses, such as college or supplemental income in retirement. Depending on the universal life contract, the cash growth can be tied to a fixed interest rate or a variable rate tied to an investment.

  • Tax advantages. Although premiums are not tax deductible, earnings may accumulate on a tax-deferred basis, and withdrawals may be tax-free.
  • Death benefit. A universal life contract can provide your beneficiaries a payout if you pass away. You also may have the option to adjust the death benefit amount while the life insurance contract is still active.
  • Potential for permanent protection. As long as your insurance contract remains in good standing and retains sufficient cash value, coverage can remain in place throughout your entire life.

How do withdrawals and loans work with a universal life contract?

With a universal life contract, you may be offered the option to withdraw from or borrow against the cash value. While making payments to the contract, you're building cash value. The amount you can withdraw or borrow depends on the available cash value built into the contract. If you pass away, the benefit may be reduced by the amount of any withdrawals or outstanding loans.

How does universal life vs. whole life insurance compare?

Universal life and whole life have similarities and differences. For example, both are types of permanent life insurance and both may include cash value. This means you can provide a death benefit to heirs and have access to cash to help pay for major expenses. However, universal life offers more flexibility than whole life because you can adjust the size of your premium payments and change how often you make payments.

Who can benefit from universal life insurance?

A universal life contract can be a good choice if you're looking for lifelong insurance coverage, access to cash value and flexibility in premium payments and death benefits. For example, younger individuals or couples may have the flexibility of making larger payments earlier in life. They then can take advantage of the growth of cash value while having the option to take out withdrawals or loans for major life expenses, such as college education or to supplement retirement later in life.

A universal life contract offers a death benefit in addition to a cash value component. Universal life also offers premium payment flexibility and the potential for lifelong insurance coverage. Connect with a local financial advisor to learn more about universal life insurance and gain personalized insight into the flexibility and protection it could provide for the rest of your life.

1 The primary purpose of life insurance is the death benefit protection. Loans and withdrawals will decrease your death benefit and the cash value available to pay insurance costs. Loans and/or withdrawals may cause a contract to lapse or terminate without value. Surrenders may generate an income tax liability and may be subject to a surrender charge. A significant taxable event can occur if a contract lapses with an outstanding loan. Contact your tax advisor for further details. Loaned values may be credited at a lower rate than unloaned values.

2 Less premium expense charges.

3 Dividends are not guaranteed and are not applicable for all series.

4 For Variable Universal Life, the accumulated value reflects the subaccount performance of the subaccounts selected.

5 Monthly deductions include cost of insurance, expense charges and additional costs associated with optional riders.

If requested, a licensed insurance agent/producer may contact you and financial solutions, including insurance may be solicited.

Guarantees based on the financial strength and claims paying ability of Thrivent.

The life insurance contract may have exclusions, limitations and terms under which the benefits may be reduced, or the contract may be discontinued. For costs and complete details of coverage, contact your licensed insurance agent/producer. Riders are optional and available for an additional cost.

Under current tax law [IRC Sec. 101(a)(1)], death proceeds are generally excludable from the beneficiary's gross income. However, death proceeds may be subject to state and federal estate and/or inheritance tax.

Investing involves risk, including the possible loss of principal. The prospectus and summary prospectuses of the variable universal life contract and underlying investment options contain information on investment objectives, risks, charges and expenses, which investors should read carefully and consider before investing.  For information on Thrivent products, see