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Understanding Universal Life Insurance

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Universal Life Insurance is often the best and most secure option for those seeking permanent life insurance, but many people purchase either term or a much more expensive whole life policy simply because they don’t understand the concept of universal life.

What it isn't
Universal Life Insurance is not Term, although an improperly educated agent can unthinkingly quote a premium that is too low to keep up with the increasing cost of insurance. When this happens the policy can simply “run out of money” at some future date. 

universal life insurance quotesUniversal Life Insurance is not Whole life, although it is a form of Permanent life. There is a difference. Whole life is priced so that your premium will always be more than the cost of insurance; thus, even if you live to age 100 or beyond, your premium will cover that cost. In this way you end up with a premium that builds some cash value with compounding interest. If you live to the age of endowment, your cash value and your face value will be equal. Neither your premium nor your face value will ever change. In a very few cases, you may be able to purchase a 10 or 20 pay whole life, which means the entire premium is paid up at a predetermined time. This paid up value is not the face value, but is simply enough premium to earn sufficient interest to both pay the COI and continue to grow the cash value.

What is Universal Life Insurance
Universal life is defined as a flexible policy that has two components, the life insurance component and a cash accumulation component. This differs from a whole life in that the COI is paid out of the cash accumulation which begins growing with the first payment. There is no actual “required” premium; you just have to keep enough in the policy to continuously pay the COI. However, a premium is calculated that will keep your cash value growing and paying the COI for several years into the future. If you pay the ideal premium, your cash will equal your face value at age 100 or 120, just like the whole life. However, you can actually pay more into the policy and have enough in the accumulation fund that after 20 or 30 years you can stop paying your premium and simply let the interest from accumulation fund pay your premium.  

The fixed universal policy is not invested in the stock market, but everything about the policy is flexible. The interest rate may be adjusted over time. At one time, universal policies paid double digit interest, making it possible to purchase a high face value for little more than the cost of a Term policy. However, interest rates over the last decade have dropped. Those people who did not remember or understand that if the interest rates dropped, it could be necessary to increase their premiums may have receive notice of a need for additional premium to keep their policies in force. This situation is not as much of a concern today because interest rates on life insurance range from 3% to about 5%--the lowest they have been in many years. Since all companies have a guaranteed “floor,” there is very little room for any further drop. Thus a properly funded URL is not likely to need an increase in premium in the future.

Variable Universal Life
A variable universal life policy is a type of contract you would purchase through a brokerage firm or insurance company that manages retirement assets as well as insurance, such as Vanguard, John Hancock, or Bankers Retirement Solutions. Unlike the fixed universal policy, the variable allows you to invest your accumulation account in any of the securities available through the firm. Such a policy requires an agent who is licensed in securities, and most insurance agents are not. Since the funds are invested in the stock market, it is possible to see large gains as well as large losses. However, as long as you maintain a certain premium, today’s companies will usually guarantee a minimum death benefit.  

Equity Indexed Universal:
Equity Indexed universal life is a universal that have largely replaced the old variable universal policies. Like a standard universal, they have a savings and a life insurance portion. Also, like other universal life policies, you can add extra cash, vary your premium, and take out cash if you need it. However the cash accumulation portion gains interest based on the growth of the S & P 500. You may be able to participate in 65% or more, depending on the company. That means, if the average growth of the S & P over the course of one year from the issue date of your policy is 10%, you will have a 6.5% increase for the year. The interest paid can—and will—go up or down each year, but will never drop below a minimum interest rate. Some companies have a cap on how high your interest can go, while others do not. Unlike a policy that actually purchases stock directly, however, you can never lose your accumulated growth. Even if the market drops, you may gain less interest in a given year, but will never lose what you already have. Furthermore, unlike variable whole life, you can usually either withdraw or borrow the accumulated interest without affecting the face value of the life insurance side.

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