Insurance Advisor, Lordship Insurance Services, California
Universal Life Insurance is a cross between Term insurance and Whole life insurance. Term insurance offers pure protection at the least expensive price. Whole life offers permanent coverage and has cash accumulation. Universal life is priced by term insurance to cover the insurance protection and has a separate cash accumulation account which not only builds value but allows the policy to extend for a lifetime. It is a great policy that helps many people.
I'll add a bit to what Jeff has said because he made a very important point about Universal Life, that it's a hybrid of whole life and term. Both whole life and Universal Life build cash value and have a separate portion that's purely death benefit, but they differ greatly in how they operate internally. I'll follow with explaining this difference. I'm going to speak somewhat generally, so don't kill me if a particular company's product behaves a little differently.
Whole Life - The internal cost of insurance is averaged over your life expectancy and stays the same year after year. Therefore, every year, the same amount of money goes toward the cost of insurance. The remainder goes to the cash account which grows by the insurance company adding money, or dividends, to the account. These dividends are set by the company based on the performance of it's investments. It can change every year but most companies will guarantee a certain dividend. Premiums are level throughout the life of the policy and, if you pay your premium, your policy is guaranteed to be there for you.
Universal Life - The internal cost of insurance increases every year based on your age just like term insurance does. The remainder goes into a cash account that the insurance company adds to as interest. This interest rate is also tied to the performance of their investments and will change from year to year. This means that, at the beginning of the policy, the internal cost of insurance is the lowest it will ever be and will increase every year. Premiums are flexible with a minimum amount due to cover expenses and the cost of insurance. Remainder goes into the cash account.
There good and bad with both. With Whole life, your premiums will usually start out higher than with Universal, but they'll never change and your policy is guaranteed to be there as long as you pay the premium. With Universal Life, the minimum premium will be much lower at inception but will increase every year as the cost insurance rises. This makes it extremely important to pay a target premium or more with universal life. That way, more money goes into the cash account to earn interest and offset cost of insurance increases as you get older. You can put more into the cash account and, therefore, it can grow more quickly, but there's a flip side to that also. if you underfund it, the increasing cost of insurance can eat up all the cash value in later years and leave you with no cash and no death benefit.
Be smart. Find an agent you can trust and go through the entire process so he/she can put together the right program for you and your family.
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Whole Life - The internal cost of insurance is averaged over your life expectancy and stays the same year after year. Therefore, every year, the same amount of money goes toward the cost of insurance. The remainder goes to the cash account which grows by the insurance company adding money, or dividends, to the account. These dividends are set by the company based on the performance of it's investments. It can change every year but most companies will guarantee a certain dividend. Premiums are level throughout the life of the policy and, if you pay your premium, your policy is guaranteed to be there for you.
Universal Life - The internal cost of insurance increases every year based on your age just like term insurance does. The remainder goes into a cash account that the insurance company adds to as interest. This interest rate is also tied to the performance of their investments and will change from year to year. This means that, at the beginning of the policy, the internal cost of insurance is the lowest it will ever be and will increase every year. Premiums are flexible with a minimum amount due to cover expenses and the cost of insurance. Remainder goes into the cash account.
There good and bad with both. With Whole life, your premiums will usually start out higher than with Universal, but they'll never change and your policy is guaranteed to be there as long as you pay the premium. With Universal Life, the minimum premium will be much lower at inception but will increase every year as the cost insurance rises. This makes it extremely important to pay a target premium or more with universal life. That way, more money goes into the cash account to earn interest and offset cost of insurance increases as you get older. You can put more into the cash account and, therefore, it can grow more quickly, but there's a flip side to that also. if you underfund it, the increasing cost of insurance can eat up all the cash value in later years and leave you with no cash and no death benefit.
Be smart. Find an agent you can trust and go through the entire process so he/she can put together the right program for you and your family.