Universal Life Insurance
Universal life insurance is a sub-category of permanent life insurance (a policy which remains in force from the moment that the policy is taken out until either death, or defaulting of the terms of the policy occurs). It is a relatively new product, and can offer greater flexibility and the potential for higher return rates, and therefore might be worth considering when it comes to taking out a life insurance policy.
Universal life policies include cash accounts. The premiums on the policy increase the cash account, interest is then paid on the account at an agreed rate. Parts of the total of the cash account are taken out as mortality charges and administrative costs, and the surrender value of the policy is the combined amount of money remaining in the cash account.
Universal life policies guarantee, to some extent, the death proceeds, but not the cash function - thus the flexible premiums and interest returns. If interest rates are high, then the dividends help reduce premiums. If interest rates are low, then the customer would have to pay additional premiums in order to keep the policy in force. When interest rates are above the minimum required, then the customer has the flexibility to pay less as investment returns cover the remainder to keep the policy in force.
Usually within a Universal life policy the owner can select one of two death benefit options, A and B:
A: pays the face amount at death, as the cash value is intended to equal the death benefit at the age of 95.
B: Pays the face amount plus the cash value, as it's intended to increase the net death benefit as the cash values accumulate. B does, however, come with a few further conditions. The caveat is that in order for the policy to be legal it must not have large cash values attached to original policies of much lower worth.
Universal life policies are sometimes erroneously referred to as self-sustaining policies. In the 1980s, when interest rates were high, the cash value accumulated at a more accelerated rate, and universal life coverage was often sold by agents as a policy that could be self-paying. Many policies did sustain themselves for a prolonged period, but the combination of lower interest rates and an increasing cost of insurance as the insured ages meant that for many policies, the cash option was diminished or depleted.
Universal life policy is a different option for life insurance, but there are disadvantages to it that should be carefully considered. Whilst it is more flexible, this flexibility can result in people paying less than would otherwise be the case into their cash account, and thus having a lower payout than expected. As with any insurance policy the best option is to shop around and make sure that you are investing in the right policy. For a good deal, have a look at Legal and General as they offer an excellent range of life insurance policies and other investments at good value.
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