What is universal life insurance?

Is my post here? Did I do it right? I didn't see any reply.

When discussing life insurance policies we need to understand there are two parts to every contract.

In both Whole Life and Universal Life, there is a death benefit. This is the amount of tax-free money that is paid to your beneficary upon your death. Most people think this is the only part of a life insurance contract that matters. Those people are wrong.

Term also has a death benefit, but it lacks something the other two policies have: Cash Value. You see, the reason term life insurance is so cheap, is because it's sole purpose is to provide a death benefit. Spread out the risk of dying over millions of people, and it takes very little money to pay the claims.

Whole Life, and to a lesser extent Universal Life, are permanent policies that have higher premiums. These higher premiums help support not only the death benefit, but also the ash value of a policy. The cash value is simply what a policy is worth if it were to be surrendered. You can take withdrawls from the cash value, you can take loans against it, etc.

Now, the word "variable" becomes very important when we talk about UL and WL. Variable means that the cash value of a policy is invested in the stock market at the policy owner's discretion. Traditionally, this asset was combined into the life insruance company's general account. Most companies have a guareenteed amount of interest they pay on a policy, and in addition to that, if they are a mutual company, grant dividends to their policy owners. It is almost like holding perferred stock in a company.

So, there is Universal Life, and there is Variable Universal Life. The difference is "what is the cash value invested it?"......if it is the stock market, it is variable, and the policy takes the risk. If it is not variable, the risk is on the insurance company's part.

Now, Universal Life differs from Whole Life in some definite ways. The interest and dividends on a Whole Life policy are usually reinvested back into the policy, providing a larger death benefit, a higher cas value, all of which matriculates into future earnings.

Universal Life has a level death benefit. Because the premiums are lower than a Whole Life policy, the investment and size of the asset is diminished.

Universal Life is like a bucket of water that has a hole in the bottom. The water represents the cash value of a policy. As we get older, we poke more holes into the bottom of the bucket. The waters runs out more quickly. In order to keep the bucket from emptying (the cash value goes to zero and we no longer have life insurance), you have to start putting more and more money into the bucket.

Unlike the substantial Cash Value of a Whole Life policy, the CV of a UL policy becomes a burden.

Some companies, in order to fulfill the desire/need for permanent coverage from a UL policy without the risk of having to deposit more money as one ages developed a rider called "A No Laspse Guarentee". This ensures that as long as one keeps making their premiums payments, even if the CV goes to zero, they will still have coverage.

The problem is you have to make the payment the rest of your life. Most people only want to worry about utilities and groceries after retirement so they can blow the rest on the grand kids. In a Whole Life policy, at least in good ones, the policy owner usually has a high enough cash value and annual dividend to do a "Premium Offset", where the policy pays for itself the rest of one's life. Again, in good contracts with good companies, this can usually be done my the 13th year of policy's existence.

Universal Life, in summation, is permanent insurance with a level death benefit and a smaller cash value that usually decipates as one ages.

Hope that helps.

Universal life insurance unlike other insurance policies such as term or whole life has three different components – the death benefits, the cash value or investment component and the expense element. But, unlike whole life insurance, this type of policy differentiates between each component and allows the policy holder the flexibility (with certain regulations) to modify the premium rate or face amount in the event of any change of circumstance or unplanned requirements. Basically, as the premiums are paid, they are credited to your policy after deducting administrative charges. Death benefit costs or any applicable rider or supplement costs are deducted monthly from the policy value. Along with this, the interest from the cash element is credited to the policy. In case this cash value of the policy is surrendered, it will be returned to the policy holder minus any applicable surrender charges.

Denise at AccuQuote
Disclaimer: I work for AccuQuote and this is my personal opinion.

Very well said Andrew.