Buy Universal Life Insurance
Universal life is a relatively new kind of permanent life insurance policy. To find and buy universal life insurance, applicants should first understand how universal insurance works. Like whole life, universal life represents a contract between the insured and the insurance company. In exchange for paying the premium, the insured is guaranteed that the beneficiary will receive a payment upon his or her death. The policy remains in force for the life of the insured, provided the premiums are paid according to the structure of the contract. The cash-building feature earns tax-deferred interest, even if the policy is not purchased with tax-qualified money or as part of a retirement plan.
Universal Life Basics
Unlike whole life insurance, however, universal life pays a guaranteed return on the investment. The amount that is guaranteed depends on the insurance company and the specifics of the policy, and it may be less than other investments. But it is guaranteed nonetheless. This may be of extreme importance to those on a fixed income in retirement. A universal policy will earn a guaranteed return and the beneficiary will be guaranteed the death benefit. In an uncertain economic environment, these two guarantees can go a long way toward providing financial peace of mind for many families.
One consideration for the investment, however, is that the insurance company, not the policy owner, determines where and how the cash will be invested. Insurance companies invest primarily in highly rated corporate bonds and US Treasuries. In order to boost returns, some will invest in equity mutual funds, such as index funds and other low-risk investments. For this reason it's always best to make sure that the insurance company that is selling the policy has the highest possible credit rating from one of the four commercial credit rating agencies.
The four are: A.M. Best, Fitch, Moody's Investor Services and Standard and Poor's. Like all life insurance policies, a universal policy represents a financial liability that may not take place for 10, 20, 30 or more years. The credit rating agencies base their ratings on the ability of the insurance company to meet its future obligations.
Why Buy Universal Life Insurance Over Term Life
Those who buy a universal life insurance policy are usually purchasing it more for its investment features than its insurance features. In many ways, universal policies function like immediate annuities. They can be bought with a single, lump-sum premium and equity is available immediately. Term life insurance, on the other hand, is purchased for the death benefit only, as it does not have an investment feature.
Universal life also offers the opportunity for flexible premiums. Should the policyholder have difficulty paying the premium, he or she can choose to pay less while still keeping the policy in force. He or she could also choose to pay the premium out of the built-up cash account. With term insurance, there is no such premium payment flexibility. If the policyholder cannot make the premium payment, he or she has no other choice than to cancel the policy.
Why Business Owners Buy Universal Life Insurance Policies
Depending on the business they're in, self-employed individuals often face unique financial challenges. Doctors, especially those who practice in high-risk specialties such as neurology and obstetrics, are often the subjects of lawsuits. While professional liability insurance can cover the amount of a judgment or settlement, in extreme cases it's possible that the doctor may have to pay a portion of the award out of his or her own pocket. Universal life insurance can protect at least a portion of the doctor's earnings because state law almost always recognizes a life insurance policy as an irrevocable contract.
Business owners will often buy universal life insurance policies to protect themselves and their business partners. In order to protect the business in the event of a partner's death, the other partner or an executive of the company is named as beneficiary on the policy. The surviving partner or employee can then use the death benefit in any number of ways. Her or she can buy out the deceased partner's shares, sell the business or close it while making sure that employees and creditors are paid what they are owed.
Finally, a business owner may buy a universal life insurance policy for a key employee who is not eligible for a cash bonus. The policy not only provides for the employee's family, it also grows tax-deferred as long as it is in force. This allows the employee to save additional money for retirement. The business owner can also make regular deposits to the policy if he or she chooses to do so based on yearly profits.
Where to Buy Universal Life Insurance
Investors can buy universal life insurance policies from almost any large life insurance company. Met Life, New York Life and Prudential are just three of the largest companies in the United States that sell universal policies. Each is also very highly rated by A.M. Best, Fitch, Moody's and Standard and Poor's.
These three companies also have experience in writing universal policies. Whereas term policies are often considered to be "commodity" insurance products, universal policies are not. Each insurance company offers its own variation of a universal policy and it's often difficult to compare one policy to another accurately. The premium structure, the amount of the guaranteed earnings and the payment of the death benefit can all be different. Investors who are interested in buying a universal life insurance policy are usually advised to discuss both their insurance and their investment needs with a licensed life insurance agent.
A reputable agent will be able to recommend specific aspects of a universal policy that may be more suited to a particular type of investor than to another. Finally, like all investment products, universal policies are offered by prospectus. An investor must always be able to ask his or her life insurance agent to clarify any item in the prospectus that is not clear.
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