Co-Founder, Coastal Financial Partners Group, California
Universal Life is a form of permanent life insurance (cash value life insurance). It is also known as Flexible Premium Adjustable Life. This is the official name of this type of product.
The key words are "flexible" and "adjustable". Premiums are flexible because they can be adjusted upward or downward, subject to an initial minimum premium. You can also skip premiums in future years. You also have a choice of level or increasing death benefit which describes the adjustable nature of the product.
Universal life builds cash value that can grow based on a stated fixed interest rate, which may vary over time, but which will never be less than a guaranteed minimum interest rate. Policy costs for administrative expenses and cost of insurance are deducted from the cash value monthly. Where whole life is a "black box" product, universal life is "unbundled" and transparent in how it operates internally.
Universal life is best suited to satisfy the longer-term needs of policy-owners who want premium flexibility and cash value accumulations that reflect current fixed interest rate returns, with a guaranteed minimum interest rate.
There are variations on the basic structure such as guaranteed UL or the popular index UL but, aside from how secondary guarantees are calculated or interest is credited, the basic mechanics are the same.
Agent Owner, Gilmore Insurance Services, Marysville, Washington State
There are several variations of "universal life" on the market today, but the basic principle exists in most all of them. Universal Life has several names that Jerry V has already mentioned. Universal life was introduced as an "unbundled life plan", in other words you could see the separation between insurance cost, administration costs and investment pool.
Every month a premium is paid in and is split among the administration cost, insurance cost and the investment pool is filled with the remaining part of the premium. Cash values grow based on what "type" of investment pool you've chosen with your purchase. This is buy term and invest the difference in one place.
Universal life is a product that must be watched and possibly changed in amount submitted because the internal insurance costs rise over time, even though a premium is paid, the policy can "blow up" if there is not enough internal cash values to supplement the external premium you've provided, the policy can expire. As Jerry noted, these are adjustable policies which means they can be adjusted up or down. Sometimes if you miss too many premiums, you can cause your policy to fail because there is not enough cash values to support the insurance cost.
A Universal Life (UL) policy is one in which part of your premium goes to pay for the actual cost of the insurance (the death benefit). Since you can pay excess premium, the excess goes toward the cash value portion of the policy. The cash value can continue to grow with your contributions as well as with interest that is earned. UL policies are very flexible in that you can borrow from the cash value, you can adjust the amount you're paying each month, you can even stop paying premiums because they could actually be paid with the cash value in the policy. You could even (for example) build a policy that grows cash value, then literally plan a future withdrawal - maybe for college tuition.
The Universal Life policy is a way to combine term insurance with an investment feature under one plan. You have flexibility of premium. The more you put in, the more your cash value grows. You can skip premiums or put less into the plan as long as there is enough cash in the plan to maintain the insurance cost. In order to make sure the death benefit will be available in your older years you MUST make sure you do not under fund your policy. As you get older the cost of insurance increases. If the cash fund does not maintain enough to pay the insurance cost the policy will lapse. You will receive an annual statement each year, make sure you review this with your agent to make sure your policy is performing as planned.
A very simple way to picture how a Universal Life policy works is with a river with a dam on it.
If the dam is open and water (your insurance premium) is flowing into the river, the river gets longer. I.e. The years your Universal Life lasts get longer, maybe even the rest of your life. At the same time, there is very little water in the lake, or cash value in the policy.
If the dam is closed, the lake gets higher, or the cash value in your policy grows. However, the river will dry up. If you want your Universal Life to build up cash value AND have longevity, you need to add more water (premium) to it.
The beauty of a dam is that it can be adjusted to harness the power of water. The same is true of Universal Life insurance. It is very adjustable and can help accomplish your financial goals.
There are several moving parts to a universal life contract, additional parts if it’s a variable universal life insurance policy. Let’s your universal life insurance policy is using an interest rate crediting method. You pay your premium annually. The front end premium load, administration cost, policy fee and mortality are deducted from your premium. Whatever is premium is left receives the interest earnings credited to the policy cash values.
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The key words are "flexible" and "adjustable". Premiums are flexible because they can be adjusted upward or downward, subject to an initial minimum premium. You can also skip premiums in future years. You also have a choice of level or increasing death benefit which describes the adjustable nature of the product.
Universal life builds cash value that can grow based on a stated fixed interest rate, which may vary over time, but which will never be less than a guaranteed minimum interest rate. Policy costs for administrative expenses and cost of insurance are deducted from the cash value monthly. Where whole life is a "black box" product, universal life is "unbundled" and transparent in how it operates internally.
Universal life is best suited to satisfy the longer-term needs of policy-owners who want premium flexibility and cash value accumulations that reflect current fixed interest rate returns, with a guaranteed minimum interest rate.
There are variations on the basic structure such as guaranteed UL or the popular index UL but, aside from how secondary guarantees are calculated or interest is credited, the basic mechanics are the same.
Every month a premium is paid in and is split among the administration cost, insurance cost and the investment pool is filled with the remaining part of the premium. Cash values grow based on what "type" of investment pool you've chosen with your purchase. This is buy term and invest the difference in one place.
Universal life is a product that must be watched and possibly changed in amount submitted because the internal insurance costs rise over time, even though a premium is paid, the policy can "blow up" if there is not enough internal cash values to supplement the external premium you've provided, the policy can expire. As Jerry noted, these are adjustable policies which means they can be adjusted up or down. Sometimes if you miss too many premiums, you can cause your policy to fail because there is not enough cash values to support the insurance cost.
If the dam is open and water (your insurance premium) is flowing into the river, the river gets longer. I.e. The years your Universal Life lasts get longer, maybe even the rest of your life. At the same time, there is very little water in the lake, or cash value in the policy.
If the dam is closed, the lake gets higher, or the cash value in your policy grows. However, the river will dry up. If you want your Universal Life to build up cash value AND have longevity, you need to add more water (premium) to it.
The beauty of a dam is that it can be adjusted to harness the power of water. The same is true of Universal Life insurance. It is very adjustable and can help accomplish your financial goals.