Universal Life Insurance
Universal Life combines the low-cost protection of term insurance with a savings component that is invested in a tax-deferred account, the cash value of which may be available for a loan to the policyholder. Universal life was created to provide more flexibility than whole life by allowing the holder to shift money between the insurance and savings components of the policy. Additionally, the inner workings of the investment process are openly displayed to the holder, whereas details of whole life investments tend to be quite scarce. Premiums, which are variable, are broken down by the insurance company into insurance and savings. Therefore, the holder can adjust the proportions of the policy based on external conditions. If the savings are earning a poor return, they can be used to pay the premiums instead of injecting more money. If the holder remains insurable, more of the premium can be applied to insurance, increasing the death benefit.
The investment feature in a Universal life insurance policy has a minimum rate of return and is generated by interest rates. Unlike with whole life, the cash value investments grow at a variable rate that is adjusted monthly. Aside from the insurance itself the investment portion of the policy is similar in many ways to a normal savings account at a bank. In markets where interest rates are high, they perform well and in times where rates are low they do not. The cost for Universal life is a bit less than whole life but you should expect to pay into this policy for a number of years before you have any substantial cash value. There is usually a minimum rate of return.
The one benefit though that these policies have in comparison to whole life is that the premiums are flexible. Universal Life allows the interest scheme allow the holder to take advantage of rising interest rates. The danger is that falling interest rates may cause premiums to increase and even cause the policy to lapse if interest can no longer pay a portion of the insurance costs.
- Flexibility to adjust the death benefit of the policy.
- Flexibility to decide when and how much more to pay into your policy.
- Builds cash value.
- The policy holder takes advantage of rising interest rates.
- Universal Life costs a bit less than whole life.
- Details of the investment portion are available.
- Premiums are variable and can be less when interest rates are higher.
- You must pay into the policy for many years before any cash value is generated.
- Premiums are variable and can be higher when interest rates fall.
If you need more control over the savings and insurance components, then universal life insurance may be a good life insurance option for you.