Personal Finance
Life Insurance

What is universal life insurance?

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Wiki User
2016-04-06 17:21:27

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.

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