Universal Life Insurance Explained

Most consumers know about whole life. After all, it is the oldest form of life insurance. People also understand term life, and it is very popular these days. They understand that they can compare the two by understanding that whole life is permanent coverage, while term life is temporary.

The newest product is called universal life. Like whole life, it is also a permanent policy. That means that it will cover a person's life as long as the policy is kept in force. Keeping a policy in force usually means that the premiums are paid, or that the policy has been paid up.

Universal life can build up a cash value. Part of the payment goes towards paying for the actual coverage, and anything left goes into a cash account. This account can earn interest or make gains by being tied to a common market index. One example of a market index is the S&P 500.

Some policies also have a minimum interest rate guarantee, so an insured person does not have to worry about losing all of their money during a market downturn. In return, their interest is usually capped at a few points below a market interest during an up year. So the policy owner will not have to worry about losing their cash, but they will also earn less than the index during a positive year. They trade some earning potential for decreased risk.

A whole life policy can also have a cash value which can earn interest, or be tied to a market index. The difference is that universal life has the insurance and cash accounts clearly defined. An owner will know how much goes to paying for insurance, and he or she will know how much goes towards funding the cash portion.

Universal life is also very flexible. An owner can choose to vary payments. He or she will have a minimum payment which was set to keep the policy in force. In addition, there will be a target premium which is set to reach certain goals. A maximum premium will be determined by the amount of the policy's face value, and certain laws about how much a life insurance policy can be funded.

During the life of the policy, the face value, or death benefit, can also be adjusted. It is usually easy to reduce the face value, but an increased benefit may require additional underwriting. After some years have passed, and insurer may or may not be willing to accept the additional risk of a higher benefit to be paid upon the insured person's death.

One advantage that attracts consumers is the idea of having their money grow in a tax deferred manner. In general, no taxes will have to be paid on the death benefit, and no taxes will be paid on earnings until the money is withdrawn. An financial adviser can help you understand these benefits, and some other possible advantages to taking loans against the policy, rather than actually withdrawing the money.

Universal life insurance is not for everybody, but if you are shopping for coverage, and if you are willing to work towards long term financial goals, you should consider it. People who like the idea of combining their coverage with their investing may be very satisfied with this type of policy.