Life Insurance

What is Universal Life Insurance?

Universal life insurance is one of the two main varieties of permanent life insurance. Unlike term life insurance, a universal policy can be maintained indefinitely. What's the difference between universal life insurance and whole life insurance (the other variety of permanent insurance)?

Whole life insurance is characterized by its uncompromising guarantees; universal life insurance is characterized by its flexibility, transparency, and affordability.

Universal life insurance is an instance of cash value life insurance. "Cash value" is an interest-bearing account of real money. It's primary role is equity for your policy—at any time, the policy owner can cash in his/her policy and walk away with its cash value.

Flexibility

The death benefit, premiums, and cash value are perpetually adjustable in the hands of the policyholder. In capable hands, that makes universal life insurance a more useful investment vehicle.

Transparency

With other types of life insurance, you pay a certain, required premium, and you never see what the insurance companies do with the money. With universal insurance, though, there is no required premium—you pay whenever you want, however much you want.

How does the insurer take its fee, then? Instead of requiring periodic payments from you, it makes periodic charges against your cash value account—a charge for administration, a charge for COI, a charge for loading, etc. You see just what expenses your policy is incurring. Understanding your policy's expenses is useful because universal insurance's flexibility permits you to make changes that will change the costs of your coverage.

Affordability

It's true that universal life insurance is not nearly so cheap as term life insurance, but it is much cheaper than whole life insurance. How can it be cheaper and grant the policyholder so much more freedom at the same time? In the real world, "freedom" equates to "responsibility," and it is by transferring responsibility from the insurance company to the policy owner that universal life insurance cuts costs.

Whole life insurance guarantees a fixed rate of cash value growth, a fixed death benefit, and a fixed rate. By altering or discarding these guarantees, life insurance companies can reduce the cost of the life insurance product.

Who Should Buy Universal Life Insurance?

Universal life insurance may be used for myriad purposes. Popular uses include but are not limited to:

A tax-advantaged investment vehicle
Varieties of Universal Life Insurance
In addition to ordinary universal life insurance, you may seek out:
Variable universal life insurance
Indexed universal life insurance

What is Whole Life Insurance?

A form of permanent life insurance, whole life insurance features guaranteed premiums, death benefits, and cash value.

You may want to purchase a whole life insurance policy if you want:

Protection for the rest of your life
Payments that stay the same each year
Coverage will never decrease

Cash value you can use while you are living.

Whole life insurance offers confidence through the guarantees it provides:

Guaranteed level premiums. The premiums you pay are guaranteed to remain the same for the life of the policy, regardless of age or health as long as premiums are paid.

Guaranteed death benefits. Beneficiaries will receive at least the face amount of the policy upon the death of the insured, assuming you do not have outstanding policy loans and that the policy premiums are paid on time.

Guaranteed cash value. Your cash value will grow each year, tax-deferred, until it matches the face value of your policy. When you need it most, you’ll have access to your cash through loan and withdrawal options.

What is Term Life Insurance?

Term life insurance is the cheapest, simplest type of life insurance. Term life insurance is temporary, meaning that a policy of term life insurance provides coverage for only a certain number of years. (You can choose 1, 5, 10, 15, 20... depending on the life insurance company.)

Any life insurance policy that is not a term policy is permanent life insurance.

How Term Life Insurance Works

Term life insurance includes the attributes common to all life insurance policies. A standard term life insurance policy guarantees fixed premiums. That means that the size of payments made to the life insurance company does not change over time. The policy owner makes payments, all of equal amount, at equal intervals of time (monthly, quarterly, semi-annually, or yearly, depending on the company and policy). The policy owner is free to discontinue payments at any time; if he/she does so, however, the policy will terminate (i.e. the life insurance company is no longer obliged to pay a death benefit).

A standard term life insurance policy guarantees a fixed death benefit. That means that the death benefit will be of a certain amount regardless of how long the policy has been in force. The insurance company will pay the same amount if the insured dies during the first day of coverage as if he/she dies during the 29th year of coverage.

Term life insurance policies provide temporary coverage. For example, a 20-year policy is intended to provide coverage for 20 years and no longer.

At the End of the Term

You might imagine that your life insurance is simply gone at the end of your term of coverage: if the insured is still alive, your beneficiary gets nothing. That's not a bad thing; after all, a healthy, living person is preferable to a cash payment. However, there are usually alternatives to letting your coverage simply cease.

Most term life insurance policies simply don't terminate after the "term of coverage." You can keep paying premiums and keep enjoying coverage. However, after the specified term of coverage, the rates you pay are no longer fixed at the level they were. Your contract will probably stipulate new rates much, much higher than you were originally paying. This alternative may be worth the higher rates, however, if your insured is ill and not far from death. Continuing your "temporary" life insurance is typically allowed only until the insured attains a certain, advanced age (often 90 years old).

Another option is conversion. Conversion means that your life insurance company will replace an existing term life insurance policy with a permanent life insurance policy of the same face amount death benefit). Life insurance companies tend to offer at least one, but it may not be a desirable one. For instance, your only option may be to convert to a permanent policy whose rates are guaranteed for only a decade. Moreover, you may not be able to exercise the conversion option at just any time. For instance, conversion may only be allowed during the first five years of your term life coverage.

A final option is renewal, but this option is comparatively rarer than the preceding options.Renewable life insurance can be replaced with a life insurance policy of the same type, face amount, and health class. Renewing life insurance spares you the hazard of being assigned to a more expensive health class. However, life insurance rates trend downward so long as life expectancy trends upward, so unless the health of your insured has deteriorated, you may find better life insurance rates by starting the application process anew.

Who Should Get Term Life Insurance?

Term life insurance is not just for bread winners. It is commonly purchased for the following reasons:

Pay for child care
Fund higher education
Cover debts or liabilities (e.g. mortgage, funeral costs)
Fund a buy-sell agreement for a business
Protect against the loss of a key employee
Replace an income stream

If you have children at home, carry debts, or own a business, term life insurance may be a good (and inexpensive) asset to maintain.