Universal Life Insurance

Posted in Life Insurance

January 15th, 2009

Universal life insurance is a permanent life insurance policy with a flexible annual premium and flexible death benefit that combines a pure insurance product with a savings vehicle, or cash asset account. In most universal policies, your minimum premium payment covers the cost of term insurance, plus administrative costs. Any payments made above the minimum are credited to the cash asset component of the policy, and invested by the insurance company to accumulate value.

In these types of policies, the cash value and death benefit that accumulates on your policy depends, in large part, on the success of the investment decisions that the insurance company makes on your behalf. For policyholders who would prefer more control over the investments made on their permanent policy, a variable universal life policy may be appropriate.

Advantages and Disadvantages of Variable Life Insurance

Variable universal life insurance allows you to select your own investments from a number of investment choices, much as you would with a company 401K plan. This plan also allows for a great deal of flexibility in payment plans, and many contracts allow policyholders to skip premiums, pay variable rates, or pay in a lump sum. As long as the cash value of the policy exceeds its expenses, the policy remains in force and the cash value grows. Any return on investment is tax-deferred, and in the event that the policy is not cashed out beforehand, the death benefit will be tax-exempt.

However, with great power comes great responsibility. Under this policy, death benefits fluctuate with the performance of investments. If investments perform poorly, you may find yourself paying more than you can afford to keep the policy in force, or the cash value of the policy may decline. Because of the associated risks, variable insurance policies are considered securities contracts and are federally regulated.

As the most flexible of all the permanent life insurance plans, variable universal life is a highly complex insurance product and should be approached with the help of a professional who can fully explain the ins and outs of its terms and conditions.