Universal Life Rates Explained
The universal life insurance product is relatively new. Unlike a temporary term life insurance policy, a universal life insurance policy is permanent. Provided the policy owner pays the premiums according to the schedule, the policy remains in force until it matures. Maturity most often occurs at the point at which the insurance company pays the death benefit to the beneficiary. In some instances, however, maturity can occur when the policy owner reaches age 95 or 100. A universal policy that matures because of the age of the policy owner will depend on the state in which the policy was sold. If it does mature because of age, the policy owner is paid the value of the account.
A universal life policy usually pays the policy owner a return that is guaranteed, but it might be less than the return that is guaranteed by a whole life policy. Universal life is similar to whole life in that a portion of the premium covers the cost of providing the insurance. The balance of the premium is invested.
The account can grow over the life of the policy, but the policy owner will need to trust that the money managers are investing the money in appropriate financial vehicles. Universal life policy owners are always advised to make sure that the insurance company has at least an A+ credit rating from Standard and Poor’s, Moody’s or one of the other major credit rating agencies.
One of the advantages of a universal life policy is the option of varying the amount of the premium and the payment schedule to meet financial situations that might change from one year to the next. In other words, a universal life insurance policy owner can reduce the amount of the payment if he or she needs to conserve cash. He or she might also choose to pay the premium from the cash account. The risk of this option is that it reduces the amount of cash and could result in a reduced death benefit being paid to the beneficiary.
How are the Rates and Death Benefits of a Universal Life Insurance Policy Determined?
The amount paid to the beneficiary upon the death of the policy owner is known as the death benefit. When choosing a universal life policy, an investor has the option of a level benefit or an increasing benefit. A level death benefit pays only the face value amount of the policy to the beneficiary. It does not pay the amount in the cash account. This reduces the cost of the policy to the policy owner.
A universal life insurance policy that pays an increasing death benefit pays both the face value and the amount that has accrued in the cash account. With this option, the death benefit usually increases every year the policy is in force. But this means that the cost of the insurance to the policy owner will not decrease during the years the policy is in force. The policy owner pays more for the insurance as he or she ages. However, as the value of the cash account increases over the years, the death benefit is larger, and can help to offset the effects of inflation.
How Does a Universal Life Policy Work as an Investment?
Universal life insurance is part insurance and part investment product. It pays a death benefit and the cash account can either increase or decrease in value. In order to sell universal life insurance, an insurance agent must be licensed and registered to sell both insurance and securities. The SEC (Securities and Exchange Commission) and state agencies regulate universal life policies. Because a universal life insurance policy is part investment product, it will normally pay a guaranteed return to the policy owner.
The return, however, might be less than that paid on other permanent policies because managing the contract and investments is more complicated. Universal life insurance policies are similar to whole life policies because the gains grow tax-deferred. And, most states allow the owner to borrow against the policy without a tax penalty. The insurance company, however, establishes the interest rate at which the owner borrows the money.
Anyone looking to purchase a universal life policy, as either a primary insurance policy or as an investment, is advised to make sure the insurance company is financially sound and has the ability to meet future financial obligations. A universal life insurance policy represents a financial liability that may not come due for decades.
If the policy takes effect when the owner is 65, the insurance company may not need to pay a claim for 10, 20 or more years. Selecting a well-respected insurance company that is has been highly rated by A.M. Best, Fitch, Moody’s Investors Services and Standard and Poor’s will allow an investor to make the purchase with confidence.
Why Would Someone Choose Universal Life Insurance?
A reputable insurance agent will always confirm that the universal policy he or she sells is in fact suited to the client. While universal life insurance policies are suited to people who need to make sure that their final expenses are covered, they are often better suited for those who use insurance policies as financial planning tools.
Like most immediate annuities, universal life policies can be purchased with a single premium. If the goal of the policy is to leave money for a spouse or to avoid probate, a universal life insurance policy might be a wise choice. A policy owner can also name a charity as the beneficiary.
But what separates universal life insurance policies from other investments is that a business owner can write off the premium expense if he or she gives the policy to an employee. Business owners who cannot give employees cash bonuses can usually provide universal life insurance policies. An individual with substantial assets or one who has the need to protect assets from lawsuits will benefit from universal life insurance because most states consider insurance policies and annuities irrevocable to be contracts.
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