Universal Life Insurance can also be referred to as a flexible premium adjustable life policy. Universal life policies were introduced in the late 1970’s and the death benefit can be increased or decreased depending on the needs of the policy owner. Universal policies provide the policy owner the flexibility to increase or decrease the amount of premium going into the policy. The policy owner may even have the ability to skip a payment, without causing the policy to lapse, as long as there is sufficient cash value in the policy at the time. As well as being a flexible premium policy, universal life is also interest sensitive. The insurer credits the cash value with a current interest rate (non-guaranteed) and backs the cash value with a contracted rate of interest (lower, but guaranteed). The contractual rate is the minimum amount the insurer will pay, while the current rate is typically based on market conditions. A universal policy thus has two components: the insurance component and the cash value component. The insurance component is the death benefit that is paid when the insured dies. The cash value component accumulates tax deferred, and can be accessed by the policy owner. When the policy owner pays the premium, a small part of it is deducted for the premium expense charge, and the balance is allocated into the cash value component. Certain expenses can then be deducted from that account, which are typically the costs of insurance and any other policy expenses. There are several types of universal life insurance policies offered in terms of how the cash value accrues interest. These can be (but not limited to): fixed, indexed and variable. A fixed policy is just that, the interest rate is set based on a fixed rate. An indexed policy uses an equity index as its method for crediting potential. A variable policy uses a portfolio of specific securities-bases funds (stocks, bonds, mutual funds, etc) to accumulate. These contracts have no guarantees of performance, and in fact, the cash value can decrease if the underlying investments perform poorly.
Types of Universal Life Insurance
- Fixed Universal Life Insurance
- Indexed Universal Life Insurance
- Variable Universal Life Insurance