Universal Life Insurance

Universal Life Insurance!

WHAT IS UNIVERSAL LIFE INSURANCE?

Universal life insurance (UL) is a flexible premium, adjustable coverage permanent life insurance policy that provides protection and access to cash values (cash surrender value) that grow tax-deferred at competitive interest rates. Universal life arrived on the insurance scene in the early 1980′s. It was declared as the ultimate in life insurance flexibility.

This life policy allowed policy owners to change the amount of insurance protection as their needs changed.  This meant that within certain limitations and requirements, policy owners could adjust the death benefit and associated premium payments to accommodate their ever changing needs without having to surrender the policy or get another one as would be required with whole life insurance. With universal life insurance policies, you control the amount and frequency of payments and coverage (subject to insure ability.)

Because only the amount of interest credited not cash value itself varies, UL can be a stable investment option. If you do not plan to keep the policy for the rest of your life, permanent life insurance may not be right for you. Consider instead a more temporary option like term life insurance or return of premium term insurance.

WHAT ARE THE RISKS OF A UNIVERSAL LIFE INSURANCE POLICY?

Although Universal insurance policies are appropriate in the right circumstances, they have failed to live up to their initial potential as the complete solution to most whole life insurance needs. Moreover, universal insurance can prove to be costly if not appropriately communicated to the insurer. A similar type of policy that was developed from universal life policies is the variable universal life insurance policy, or VUL.

VUL’s allow the cash value to be directed to numerous accounts that operate like mutual funds and can be invested in stock or bond investments with greater risk and potential reward. Getting back to the topic at hand; Universal life insurance is not convertible which means if your policy lapses you either have to shell out more money to re-instate it or walk away frustrated and uninsured!  To better understand why, lets look at how universal life insurance works.

HOW DOES UNIVERSAL INSURANCE(UL) WORK?

Think of a Universal life policy as a bucket into which you pour liquid money. The bucket has a spigot at the bottom, and the life insurance company opens the spigot to drip money out of the bucket to pay for monthly expenses associated with the life insurance policy. Meanwhile, money left in the bucket accrues interest (cash value) at a rate declared by the insurance company’s current interest rate. It is the responsibility of the policy owner to maintain enough money in the bucket (by making adequate, timely premium payments) to keep the policy in-force. 

On traditional permanent life/whole life insurance, the pricing elements are “bundled” together and guaranteed for the life of the policy. The whole life policy holder has one responsibility, pay the premiums on time. In doing so, the policy will never lapse and eventually it will mature as a death claim, period. Universal life is different. A universal life policy “un-bundles” the pricing elements that make up a traditional whole life cash value policy (company expenses, mortality costs, interest earnings) and prices each separately.

With Universal life insurance, life insurance companies can elect to raise the expense charges and mortality costs, lowering the amount of interest credited to the accumulating funds bucket. Additionally, many UL policy holders have learned the hard way that what they ‘thought’ was permanent/whole life insurance became more like a continuously renewable term policy; un affordable as they grew older.

Monitoring your in-force Universal life policy.
UL policy holders are well advised to ask your insurance company for what is called an ‘in-force illustration’ every two or three years. An in-force illustration allows you to see how your UL policy has performed based on actual crediting rates. It also gives a projection of future performance based upon current values and assumptions compared with guaranteed minimum values. This illustration includes three projections: a minimum guaranteed projection, a favorable projection and a slightly pessimistic projection. An in-force illustration is essential to effectively monitoring the progress of your universal life policy.

RECENT DEVELOPEMENTS FOR UNIVERSAL LIFE INSURANCE
To make universal life policies more attractive. Many life insurance companies are offering a lifetime guarantee with the universal policy. This means the policy provides lifetime coverage. It may lose it’s cash value but the death benefit can be guaranteed for life.
This could aslo apply to your variable life insurance policy as well.

     PRO’S-

  •  * Tax-deferred account value growth. Your policy account earns interest at the company’s current rate. Income tax free.
  •  * Flexible premium payments and death benefit coverage based upon your changing needs.
     * Protects your family from financial hardship in the event of your death.
     * Tax-free death benefit to the beneficiary.

   CON’S

  •     * Insurance companies may raise insurance charges and mortality cost lowering the amount of credited interest and cash  value growth.
        * Adequately funding your universal life policy can become expensive and challenging forcing your policy to lapse.