What Is Universal Annuity?

Universal annuities can provide retirement income but carry risks.

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Universal annuity life insurance is a hybrid between life insurance and a retirement savings product. Like most other life insurance products, it pays a set benefit when you die. Along the way, it also builds up cash value and pays a return on that value. Universal life is longer lasting than term life while being more flexible and, theoretically, more affordable than whole life coverage.

Universal Annuities for Insurance

When you take out a universal life policy, it is a life insurance policy. You choose a death benefit and pay your premiums and, if you die, your beneficiaries will get that amount. Your insurer may give them the option of receiving a higher payment if they take the payments over time, though. In addition, you may also get a benefit that covers you if you become disabled.

Universal Annuities for Savings

In addition to the insurance features of a universal annuity policy, it's also a savings plan. While some of your premiums are used to pay the cost of providing your life insurance benefit, a portion also gets invested. Many universal annuities offer a guaranteed fixed rate but also give you the opportunity to increase your payout by investing in different vehicles through the annuity. This variable feature carries some risk, but could give you more income over time.

Paying Universal Annuity Premiums

When you take out a universal annuity, you have to pay premiums like you would for any other insurance. Over time, as you build cash value in your policy, the returns from the policy are more than enough to fund growth in the policy and to pay the premium. This is how a universal annuity gives you insurance and income when you reach your retirement years. However, if you opt for a variable policy to get a higher return, you also take the risk that your returns will drop and no longer cover your premium. In that instance, you could either lose cash value or have your policy lapse for non-payment.

Benefits and Drawbacks

The benefit to universal annuities is that they are convenient, combining insurance and savings into one product. Your money also grows on a tax-deferred basis inside your universal annuity, giving you some of the same benefits of a 401(k) or an individual retirement account but without taking up the limited amount of money that you can contribute to one of those accounts every year. On the other hand, universal annuities can be very expensive if you pull your money out early as well as carrying ongoing fees while your funds are invested. It's also wise to carefully review your annuity to understand what your guaranteed return is and what might happen if the annuity doesn't reach its projected return targets. The cost of the premium for the life insurance policy built into the annuity can suck up a large portion of your return and even jeopardize your policy if returns are significantly lower than expected.