Understanding Universal Life Insurance:
Like Whole Life, Universal Life Insurance (UL) includes a savings element that grows, tax-deferred. A portion of the premium is invested by the insurance company in very conservative vehicles such as bonds or treasuries. If the insurance company does well with these investments, the interest rate return on your accumulated cash value will be higher than the policy guarantee (usually around 4%). It works like this:
- From each premium payment, an expense charge (usually 5%) is deducted. The balance (95%) is added to the policy Account Value.
- Next, the actual cost to the insurance company for all insurance benefits and expenses related to the policy for that premium period are deducted from the Account Value.
- The Account Value earns interest in that premium period which is credited to the account (but not less than the minimum).
A major potential advantage of UL is that if the company does very well with its investments, you may have excellent growth in the cash value of the policy. UL is also more flexible than whole life in that the death benefit and commonly the premium payment are flexible. Unlike other whole life policies, you can increase (subject to insurability) or decrease the death benefit without surrendering the policy or getting a new one. Also you may choose from a variety of premium payments options.
On the other hand, there are some added risks to a UL policy. In a whole life policy, the death benefit is guaranteed to be paid if all premium payments are made. In a UL the policy will lapse if the cash values combined with premium payments are not enough to cover the cost of insurance. Insurance companies are not interested in having policies lapse, so generally there are multiple safeguards against this happening.
Many people use UL Insurance as a source of cash payments to the owner of the policy, including loans, withdrawals, collateral assignments, split dollar agreements, pension funding, and tax planning. Contact us now to learn more about how this works.