Index | Life Insurance | Universal Life Insurance
Universal Life Insurance
One more type of Permanent Insurance is represented by a variety of Universal Life Insurance policies. Universal Life Insurance is a comparatively recent type of Life Insurance in the USA. It appeared in the 1980s as an alternative to the traditional Permanent Life Insurance policies known for lower interest rates of return.
Universal Life Insurance is aimed to procure lifetime insurance protection with an orientation towards an older age. Being a type of Permanent Life Insurance, Universal Life Insurance offers the opportunity of building up the cash value under tax favorable conditions. The distinctive feature of this insurance plan is its flexibility. It manifests itself in a number of ways. Thus, Universal Life Insurance allows you to vary your policy premium payments. Moreover, the face amount of death benefit is also flexible and you can increase or decrease it with regard to your current financial opportunities.
How can you take advantage of this promoted flexibility? You pay a fixed initial premium and then you are free "to take the wheel" and decide for yourself when and how much you pay. You may even skip payment at a certain point provided the cash value is enough to cover the policy cost. The insurance company in this case charges the cost from your cash value account. Even if you lose your cash value, you may preserve the insurance amount by paying adequate premiums.
If your premium payment and the interest growth are not enough to cover the charges and reimburse the insurance cost, your insurance account value will decrease. Eventually, your policy may lapse. As a result, the death benefit will no longer be in force. This is a notable difference between Whole Life Insurance under which your policy is in effect as long as you pay the premiums and Universal Life Insurance under which your premiums may be insufficient to maintain the coverage.
To prevent this unfavorable outcome you can either increase your premiums or decrease your death benefits without surrendering the policy. Nowadays, however, some insurance companies offer a no-lapse guarantee under Universal Life Insurance, according to which as long as you pay the fixed premium, the policy will stay in force up to your 100th birthday (potentially even longer, up to your 120th birthday).
In a different situation, if you have accumulated a sufficient cash value and there is enough money on your account to cover the premium, you may still want to pay the amount you find appropriate to earn interest which is credited on a tax-deferred basis. The portion of the premium that is above the sum necessary to cover the cost of the policy will be funded into your savings account thus building up the cash value. Therefore, an important detail to keep in mind is that ideally your premium payments should surpass the cost of the policy. Otherwise no interest can be earned.
Attractive as Universal Life Insurance looks; it has certain limitations which are set in your policy. For example, withdrawals are normally subject to limitations. Thus, usually you are allowed to withdraw not less than $500 from your cash surrender value. And you are not allowed to withdraw money more than 4 times a year. If you decide to decrease the coverage, you must be aware of the fact that a decrease below the required minimum may lead to a surrender charge applied against the cash value.
Premiums for Universal Life Insurance are normally high, especially in the early years of the contract. For a comparison, Universal Life Insurance premiums are generally lower than Whole Life Insurance payments, but higher than payments for Term Life Insurance. The good news is that your policy premiums can be readjusted on a monthly basis and these changes are aimed at providing you with an opportunity to take advantage of rising interest rates. The interest rate is also liable to change and may decrease, though not below the 4% level.
If you are thinking about purchasing Universal Life Insurance, you should know that there are many financial expenses associated with this type of Life Insurance policies which result in deductions from your premiums. With most plans some administrative charges will be deducted from your premium. Besides, most Universal Life Insurance policies stipulate for a decreasing surrender charge which is deducted from your cash value if the policy is surrendered.
There are two general types of Universal Life Insurance policies. With Type A policies the cash amount is added to the face value and is paid out as the death benefit. With Type B policies your beneficiary will receive the face value of the policy and the best part of the cash account. Premiums for Type B policies are usually higher as they offer greater flexibility and serve as a profitable investment tool.
One more important feature of Universal Life Insurance deserves a special mention. Unlike Whole Life Insurance, with Universal Life Insurance all the financial operations are transparently disclosed to the policyholder. So, you can easily trace all the internal financial operations with different elements of the policy: the premiums, the cash value, the death benefit, interest credits, loans and different expenses.
On the whole, alongside the outlined potential benefits, Universal Life Insurance policies have a number of inherent limitations. Do not feel embarrassed to talk to an insurance company representative to get to know more about the details of the coverage the company offers. The simplest guidelines you can follow are simple. If you do not need or do not want to keep this insurance for the rest of your life and need coverage just for a short-time period, this type of insurance is, most likely, not for you. It takes time for the saving portion of your policy to transform into a profitable investment.
Universal Life Insurance is right for you if you are ready to commit for a long time - for example, if you are planning for your retirement years (70 and older). At the same time it may happen so that you will have to keep your policy for 15 years before you become eligible for the return of the policy. It may be reasonable to consider Term Life Insurance or Return of Premium Term Insurance in this case. But if the initial payments and further conditions of the coverage satisfy you, Universal Life Insurance can be a good investment vehicle allowing plenty of flexibility so that you can tailor your payments to the financial circumstances.