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
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
(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.