Universal Life Insurance

Universal Life is a type of permanent life insurance based on a cash value. That is, the policy is established with the insurer where premium payments above the cost of insurance are credited to the cash value. The cash value is credited each month with interest, and the policy is debited each month by a cost of insurance (COI) charge, and any other policy charges and fees which are drawn from the cash value if no premium payment is made that month. The interest credited to the account is determined by the insurer; sometimes it is pegged to a financial index such as a bond or other interest rate index.
This type of insurance policy is one type of permanent life insurance. With a permanent policy, the insurance is designed to last as long as you pay the premiums. Whole life insurance guarantees this lifetime protection. Universal life does not have these guarantees but there are now universal life policies where you can add a feature that guarantees that the insurance will last the rest of your life. Universal life insurance, similar to whole life insurance, is a permanent life insurance policy; however, universal life is more flexible than whole life.

Next, when comparing universal life rates, look for the following features and talk with your life insurance agent about the flexibility of these features, as well as how useful they will be to you and your family, given your specific needs, wants, and life situation.

• The ability to increase your death benefits

• The interest rate your savings component – cash value account – will earn

• The ability to alter your policy premium payments

Some universal life insurance policies allow you to increase your death benefits as long as you pass a medical exam. Plus, once you have purchased your universal life insurance policy and have started accumulating money in your cash value account, you may be able to alter your policy premium payments. This means you can use the money in your cash value account to pay for some of your premiums, which is a great help in times of financial stress. Note that this option should be used sparingly – once the money in your cash value account has been exhausted, you risk losing your universal life insurance coverage if you aren’t aware that the premiums aren’t being paid

Many Universal life insurance now offers "term-like" rates for your whole life. When buying life insurance in the past, most people chose

term insurance because it seems to be the most cost-effective plan to cover a period of time when they need the maximum insurance. In the past, the longest guaranteed period offered by insurance companies was 30 years. Sometimes, depending on age, the maximum might drop to 20, or even 10 years. When a life insurance need is indeterminate or lifetime, such as making sure your family will receive insurance proceeds at death no matter how old you are, the three main options were whole life, a combination of whole life and term, or universal life insurance. In order to guarantee rates to 100, one needed to pay approximately double what a normal projected rate might be for a whole life and term combination, universal life, or the guaranteed whole life rate. Many companies have now come out with a universal life insurance plan with premiums payable to age 100 and coverage that stays in force until age 120, or longer. The rates are completely guaranteed and can never be increased, regardless of the interest rates paid by the insurance company, or the mortality charges. These rates are approximately the same as the universal life or whole life and term combination bought on a low cost basis. How can the insurance companies magically guarantee plans that could never be guaranteed before? The answer is that the death benefits are reinsured by "reinsurance companies" which charge the insurance company the approximate equivalent of a guaranteed term rate to age 85. In the past, when an individual bought a universal life insurance policy, that plan stood on its own and had to stay in force based on its own earnings and guarantees. The new program puts the risk on the reinsurer and they pool these policies with thousands of other people buying similar insurance. Therefore, if the average person lives to age 85, insurance companies will not only not lose money, they make money as they always do.