Universal Life Insurance

Summary

Universal life (also called adjustable life) is similar to whole life in that it is a permanent policy that accumulates cash value. The main difference is that you accept a lower guaranteed investment return in exchange for more policy flexibility. The cash value portion of the premium is invested by the company and you receive whatever rate of return the company is able to achieve subject to a minimum guaranteed return. You can adjust both the premium payments and the death benefit during the life of the policy. Universal life is a good choice for individuals who need permanent insurance and anticipate significant fluctuations in their investment and insurance needs over the course of their lifetimes.

Variations

The basic structure of the universal life policies offered by most carriers is similar. The differences are found in the guarantees and the degree of flexibility. There are three factors that affect the guaranteed investment return: 1) the guaranteed interest rate; 2) the amount deducted to fund the death benefit; and 3) policy fees. It is important to note that a policy offering a higher guaranteed interest rate may not be a bargain if offset by higher fee and death benefit charges. Other areas of difference include the degree of flexibility offered for increasing the death benefit without medical underwriting and the option to have the cash value distributed directly to beneficiaries in the event of your death.

Advantages

There is no clear cut advantage or disadvantage to one type of permanent insurance over another. Each type has its appropriate use. Whole life offers more security than other types of permanent insurance but has less flexibility. Many buyers of whole life insurance are attracted by the convenience of one fixed cost product that guarantees their lifelong insurability, creates a safe and secure emergency fund, and provides liquid assets to their heirs. Buyers of universal life like the flexibility of a policy that can start out with modest premiums and benefits, increase as their family grows, provide a source for college funding, then be scaled back during the "empty nest" years. Buyers of variable life are more comfortable making their own investment decisions rather than having the insurance company choose the investments.

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