Universal Life Insurance
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Universal Life Insurance is a variation of whole life insurance with considerable flexibility. Universal Life allows the policy owner to determine the amount and frequency of premium payments and also gives them the ability to adjust the insurance amount based on their individual needs.
Universal Life insurance has two components; a term insurance cost component and a side fund component similar to whole life insurance policies that grows tax deferred. The term cost component is based on an individual’s age and continually increases as the insured gets older. The side fund is increased by the difference between the actual premium paid into the policy and the cost of the term insurance. The premise for these policies is to set the premium at a level significantly higher than the term insurance costs to allow for the side fund to grow. As long as the premium payment is above the cost of the term insurance, the cash value will grow based on the interest rate credited. If however, the premium payment is insufficient to cover the cost of the term insurance the cash value will be reduced by the difference. Once the cash value begins to be reduced to pay premium deficits, the insured must increase the premium payment or risk the complete exhaustion of the cash value over time which results in total lapse of insurance protection. For this reason, it is critically important to get death benefit guarantees added to the policy. With guaranteed death benefits, no matter what the cash value, as long as you pay a given premium, the policy will remain in force.
Advantages of Universal Life
* Depending on the product, you can have guaranteed coverage for life.
* Premiums can be flexible or fixed.
* Will build cash value if funded properly.
* Tax deferred growth of cash value.
* Policies may offer many “investment” allocations to place cash values.
Disadvantages of Universal Life
* Too expensive over the short-run.
* May not be able to afford the coverage needed.
* May not last forever if not guaranteed.
* Returns on cash value may be lower than expected.