Universal Life Insurance Policies Explained
Life insurance is most commonly divided into two categories: Term and permanent. A term life insurance policy is temporary. It is purchased for a specific period of time and matures when the payment of premiums stops, the death benefit is paid or if at the end of the term, the insured is still alive. A term policy must then be renewed in order to provide continued coverage.
Permanent insurance, however, lasts for the life of the insured as long as premiums are paid according to schedule. A permanent life policy matures only when the death benefit is paid. (Some states also consider a permanent life policy mature when the insured reaches age 95 or 100. Consumers are advised to check with their state insurance boards in order to find out at what age, if any, a permanent life product matures in their state.)
Unlike term policies, permanent life insurance policies build cash value over time. The initial investment in the policy and the interest and earnings that accrue over time can be withdrawn by the policyholder. A permanent life insurance policy can also be borrowed against in order to apply for a secured loan such as a mortgage.
What are Universal Life Policies
Universal life insurance policies are permanent life insurance policies. A universal policy has three separate and distinct parts: The premium that is paid by the insured, the death benefit this is paid to the beneficiary upon the death of the insured and the vested value that increases over time. The premiums that the insured pays are placed in the cash part of the policy.
A universal life insurance policyholder can direct the insurance company as to how he or she prefers the premiums to be invested. He or she can usually choose among a number of different investment options in order to meet the objectives of the policy. If the value of the investments increase, the account is credited. If the value of the investments decrease, the amount of cash within the account is decreased. The danger of a universal life policy is that it can decrease in value.
What Type of Return is Paid on a Universal Life Policy
Because a universal life insurance policy pays a death benefit and can either increase or decrease in value, it is both an insurance product and an investment product. Only licensed insurance agents who are also registered securities dealers can sell universal life policies. As an investment product, a universal policy will almost always pay a guaranteed return. However, the return can be smaller than that of a more traditional permanent whole life policy because of the more complicated investment options.
Universal life insurance policies are similar to whole life policies because a portion of the premium for each goes toward covering the cost of the insurance part of the policy. The gains for both types of policies grow tax-deferred.
It’s important for those looking at a universal life policy as either an insurance or investment product to make sure the company from which they are considering buying the policy is financially sound. A life insurance policy represents a financial liability that exists at some point in the future. If an insured purchases the policy at age 65, the insurance company may not have to assume the liability for another 20 or 30 years. Choosing a company that is highly rated by A.M. Best, Moody’s Investors Services and Standard and Poor’s will go a long way at providing peace of mind throughout the years.
What Advantages Does Universal Life Present Over Term Insurance
For older investors with the financial discipline and means to make the required premium payments, universal life insurance can represent a substantial benefit over term life insurance. As stated previously, term insurance is temporary and does not provide an investment option. And, the cost to renew a term policy can often be more expensive over the long run than purchasing a universal policy. In addition, most insurance companies will not issue a term policy after age 75. Therefore, a universal life insurance policy provides much greater financial stability and insurance coverage than a term policy for most people.
Universal Life Insurance Policies and Suitability
Insurance agents want to make sure that the policies they sell are the best suited policies for their customers. So while universal insurance policies can be suited for people who want to make sure their funeral and final expenses will be covered, they are often more suited for financial and estate planning purposes.
Like annuities, universal life insurance polices can be purchased with a single premium or lump sum payment. If the objective of the policy is to leave money for a beneficiary or to avoid the time consuming and costly ramifications of probate, a universal life policy can be a good choice. Charitable concerns can also be the beneficiaries of universal life insurance policies.
But what sets universal life insurance policies apart from other investment vehicles is the ability for business owners to deduct the premiums as a business expense if the policy is given to an employee. Business owners who are forbidden either by law or by charter from giving employees cash bonuses can give life insurance policies as bonuses. Individuals with a high net worth or those who need to protect assets from frivolous lawsuits can also benefit from universal life insurance policies, as most states consider insurance contracts irrevocable and the money within them protected.
But, in order to not forget that universal life insurance policies are also part insurance product, they are also suited for individuals who want to make sure that their families will be taken care of in the event they should die. For a primary earner who wants to insure that his or her spouse and children, and potentially a parent, will not suffer a financial loss as well as an emotional one, a universal life policy can offer liquid cash reserves along with a substantial death benefit.
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