What Is an Unbundled Life Insurance Policy?

An unbundled life insurance policy is a type of financial protection plan that provides cash to beneficiaries upon a policyholder's death. An unbundled life insurance policy contains a savings and investment component that the policyholder can use during his or her lifetime. Provisions of the policy do not have expiration dates and the policyholder can adjust the amount and timing of premium payments tied to the amount of the death benefit while the policy is in force. Unbundled life insurance is also called universal life insurance.

Understanding Unbundled Life Insurance Policy

Universal/unbundled life insurance is one of several types of permanent life insurance. Unbundled life insurance has a cash value component, in which a portion of each premium payment can be saved and invested on the policyholder's behalf. The other portion of the premium goes toward the death benefit and administrative expenses.

With universal/unbundled life insurance, the premiums and death benefit can be changed during the life of the policy. This can be a desirable feature if the policyholder's needs change. The universal/unbundled policy also clearly discloses the policy's administrative fees—also called underwriting and sales expense charges—to the policyholder, whereas other types of permanent life insurance policies may not.

Within the permanent life insurance category, individuals can choose from whole life, universal/unbundled life, variable life, and variable universal life options. Some of the key benefits of the unbundled life insurance policy include its flexibility and allowance for the policyholder to see exactly where his or her premium payments are going.

Elements of Unbundled Life Insurance

Every life insurance policy comes with its own provisions, which can vary by company and type. Some of the basic elements an individual can expect in an unbundled life insurance policy include the following.

Flexible Premiums

One of the most noteworthy features of an unbundled life insurance policy is its flexible premiums. The flexibility in premiums is tied to both the option for an adjustable death benefit and the cash value element. Directly, the premiums are based on the coverage amount and policyholder risks. Unbundled life insurance policies often allow the policyholder to adjust their death benefit and corresponding premium. This allows the policy to be changed with the changing needs of the holder. Premiums can flexibly decrease or increase with decreases or increases in death benefit coverage.

Cash Value

Unbundled life insurance policies include the option for a savings component. The savings component will usually have a stated interest-earning rate. Individuals can usually contribute to the cash value at any time or with payments in excess of their stated premium. Payments of the premium can usually also come directly from the cash value for added premium payment flexibility.

Loan Option

Most unbundled life insurance policies come with a policy loan option. The borrowing amount is usually based on the cash value. This allows the policyholder to obtain tax-free payouts but requires regular payments at a specified interest rate. Interest rates are often lower than other traditional loan options. The loan can be considered a type of collateralized loan since the life insurance policy and its cash value usually serve as collateral for missed payments and defaults.

Surrender Options

A surrender option allows the policyholder to terminate the policy and withdraw their cash value. The cash value is usually subject to surrender charges which can vary depending on the year of termination. Cash values can usually be withdrawn directly by the policyholder. Other alternatives may also exist such as a paid in full life insurance policy death benefit for varying amounts.