Universal Life Insurance Companies
Universal life insurance companies sell universal life insurance, along with other types of permanent and term life insurance. Some insurance companies have been selling universal life for quite some time. For others, universal policies are relatively new.
Unlike term life insurance, which is temporary, universal life insurance is a type of permanent insurance. As long as the policyholder pays the premiums, the policy remains in force until it matures. Universal life insurance companies consider a policy mature when the death benefit is paid to the beneficiary.
Universal Life Returns
Universal life insurance companies usually provide universal life contracts that pay a guaranteed return. However, sometimes the return is smaller than one guaranteed by a more traditional whole life policy. Universal life is similar to whole life insurance as some of the premium covers the cost of the insurance. The balance is invested by the universal life insurance company in it’s own portfolio.
The owner of a universal life insurance policy must ensure that the fund managers are investing in reputable and safe financial instruments like Treasury bonds and highly rated stock and bond mutual funds. Those interested in investing through universal life insurance companies are always advised to ensure that the company has at least an A+ rating from AM Best, Standard and Poor’s and Moody’s.
One main advantage of a universal life policy is the ability to adjust the premium amount and payment schedule in order to meet changing financial needs and obligations. For example, the owner of a universal life policy can reduce the amount of the premium if he or she needs to due to an unexpected financial issue. He or she can also deduct the payments from the built-up cash account. The risk to this strategy is that it could leave less in the account and reduce the death benefit.
Universal Life Insurance Companies and the Death Benefit
Universal life insurance companies offer policies that earn fixed, variable or indexed returns. This means that the rate paid by the universal life insurance company is a fixed rate, a variable rate or a rate that is tied to a specific market index like the Standard and Poor’s 500. Fixed rate policies are interest sensitive. This means they can earn less should interest rates rise. Some universal life insurance companies guarantee that a minimum interest rate will be paid.Universal life insurance companies typically offer two death benefit options: A level death benefit or an increasing death benefit.
A Universal Life Level Death Benefit
The face amount of the universal life policy is paid at maturity (death of the policyholder or when he or she reaches age 95 or 100, as dictated by the state in which he or she resides). The built-up cash value of the policy is not paid to the beneficiary. The policy owner effectively reduces the cost of his or her cost once the cash value of the policy equals the face amount of the policy upon maturity.
A Universal Life Increasing Death Benefit
An increasing death benefit pays the beneficiary both the face amount of the policy and the accrued cash value. This allows for the potential of an increasing death benefit increases each year policy realizes gains from the investments. However, this can also mean that the price for the insurance does not decrease as the premiums are paid over time. As the policyholder ages, he or she continues paying increased costs for insurance.
Calculating the Interest Credited to a Universal Life Policy
Universal life insurance companies offer equity-indexed policies as a variation on the fixed, or interest sensitive, policy. Interest is applied based on an increase in the underlying market index, which is usually the S&P 500. While the method of figuring and crediting interest earned varies among universal life insurance companies, the method most often used is the point-to-point method.
It uses the anniversary date of the policy to calculate the interest earned from year to year. While it can be possible to get a higher credit than with a standard fixed rate policy, the drawback with an equity-indexed policy is that the market can potentially increase more at an alternate point in time. In other words, if the start date is April 15, the owner earns the rate from April 15 to April 14 of the following year. Should the S&P 500 increase at another point, the additional gain would not be earned.
In addition, most universal life insurance companies place a cap the total amount of interest that can be earned. If the rate is capped at 10% and the S&P 500 increases 11%, a maximum of 10% of the 11% increase would be earned. However, if the S&P 500 index is lower during the point-to-point start and end dates, the loss is usually not deducted from the cash value of the account.
Which Companies Sell Universal Life Insurance
Universal life insurance companies range from very large publicly traded companies such as MetLife and Prudential to mutual companies such as New York Life and Liberty Mutual. A publicly traded universal life insurance company issues stock that is traded on a stock exchange. The stockholders own a publicly traded company. A mutual company, on the other hand, does not issue shares of stock. Its policyholders own the company. (For those who wish to purchase universal life insurance from a mutual company rather than a publicly traded company, the word mutual will more than likely be in the name.)
Whether seeking to purchase universal life insurance from a public or mutual company, applicants are advised to ensure that the company has the best possible ratings from either Standard and Poor’s or Moody’s Investor Services. These companies, along with Fitch and A.M. Best issue credit ratings that provide insight on a universal insurance company’s ability to meet its short and long-term financial obligations. After all, when a universal life insurance company sells an insurance policy, it is taking on a financial liability that may not occur for 20 or more years.
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