Most people are familiar with whole life insurance and term life policies, but they do not understand universal policies. Universal life insurance is similar to whole life insurance, but offers more flexibility in the amount of the monthly premiums and the death benefit. Unlike whole life insurance, which remains in force after the premium has been paid in full, universal life insurance remains in force only as long as the premium is paid. Like whole life, universal life policies have a cash value, which many people prefer.
Whole life insurance premiums are invested during the term of policy payments, creating a cash value for the policy. Universal life insurance premiums are also invested after the insurance costs are deducted from the premium payments. If premiums are not paid during the term of a whole life policy, the policy lapses and the death benefit will not be paid. In universal life policies, however, the cash value can be applied toward premium costs and the policy does not lapse until the cash value is exhausted.
Flexible Monthly Payments
Whole life insurance policies have a fixed monthly premium and a fixed term, usually ten or twenty years. When the term is up, the policy is paid in full and remains in force until it is redeemed for its cash value or the death benefit is paid. Universal life insurance offers a minimum and maximum monthly payment. This gives the policy holder the opportunity to invest additional funds in the cash value of the policy while covering the cost of the death benefit.
Adjustable Death Benefit
The cost of life insurance is based, in part, on the amount of the death benefit. A thirty five year old man with a young family needs more life insurance than a sixty five year old man with no dependents. Universal life insurance allows policyholders to adjust the death benefit to meet their current needs and divert more of the premiums into the cash value of the policy. The flexibility of the policy makes it practical for policyholders to maintain the same policy when their insurance needs change.
Other Policy Terms
Universal life insurance differs from term life insurance since it has a cash value and it doesn’t necessarily expire when the insured stops paying premiums. The cash value of the policy is applied toward the monthly insurance premiums. This is meant to allow the policy to remain in force until the cash value is exhausted. This type of life insurance is attractive to people who have seasonal fluctuations in their income and those who are self employed and may have occasional financial shortfalls.
There are variations of universal life insurance which include policies with a guaranteed death benefit after the premium has been paid for a specified term. There is also a variable universal life policy, which allows cash value to be sent to separate accounts; this policy operates like a mutual fund and invests the cash in stocks and bonds. There is greater investment risk involved with variable universal life insurance than with standard universal policies and the minimum premiums may be higher.