What is universal life insurance?

Universal life insurance is a type of whole life insurance. Universal life differs from other whole life policies in that it allows the policy owner to vary, with limitations, the amount and timing of premium payments and the death benefit. These changes can be made while the policy is in effect.

Universal life is NOT whole life. Universal life is Annual Renewable Term plus cash value (a savings). Look at your universal life policy. First, look on the page that shows your policy number, name, coverage amount, etc. Look to see if you have option 1 or option 2 (it may be under option I and option II, or A,B)

If you have option 1 - your beneficiary only gets the FACE AMOUNT. Assume you have $100,000 of coverage and $5000 of savings. When you die, your beneficiary only gets the $100,000!

However, if you have option 2 (which usually has a higher premium) your beneficiary gets BOTH the face amount plus the cash value.

Having that knowledge, who would choose option 1? It's usually never explained. Also, if you look at the index of your policy, you can look up the definitions of Option 1 and Option 2,

With Universal Life being Annual Renewable Term (plus cash value), the cost of insurance goes up every year because the odds of dying are greater. There is a table that shows your cost of insurance per $1000 of coverage in your policy. Look at how the cost goes up EVERY YEAR.

But your premium doesn't neccessarily go up. Eventually what happens is that your monthly premium can't cover the cost of insurance, so the company will take money out of your cash value.

(Ever hear it will pay for itself?) Yet, you'll get to a point where you have no more cash value left, and the premiums are too expensive to continue the insurance.

Once again, the insurance company wins.

Universal life is neither whole life or annual renewable term. It is a distict animal all it's own. The basic premise in universal life is that the cost of insurance for younger ages can (and should) be overfunded.

This amount of overfunding is the cash value. The benefit of this strategy is that the cash value can grow at a modest market sensitive interest rate and can accumulate to a point where the internal cost of insurance can be subsidized by this cash value when the premiums are insufficient to pay for the COI.

Based on the future experience of the crediting interest rates, a reasonable approach can be taken to increase or decrease premiums as required to keep the policy in force for a specified period of time. UL cannot effectively be compared to term insurance, nor is it easy to compare to Whole Life policies.

The differences in Options 1 & 2 death benefits are associated more with the desire to view the instrument as a life insurance policy or a cash accumulation vehicle. There are many other factors that should be looked at to maximize the benefits for either situation, but that being said, they can function as either a cash accumulator or a death benefit engine economically but can not be both at the same time.

A permanent life insurance policy has three components - the death benefits (protection), the expense component and the cash value component. A universal life insurance policy will differentiate and itemize these three components, which will allow for more flexibility in the policy. The policy owner then has the facility to modify the face amount or the premium rate (under specific guidelines) to meet with changing circumstances and needs in his or her life.