Universal Life Insurance
Another form of permanent life insurance, but sometimes more affordable, Universal Life (UL) insurance policies are intended to combine permanent insurance coverage with greater flexibility in premium payment, along with the potential for greater growth of cash values. There are several types of universal life insurance policies which include interest sensitive (also known as "traditional fixed universal life insurance"), variable universal life (VUL), guaranteed death benefit, and equity indexed universal life insurance. With Universal Life, your overall premium payments are put to two uses. First, part of your overall premium goes toward keeping the death benefit in effect. This is called the Cost of Insurance (COI). Then the amount of your premium in excess of the COI and other policy charges are invested in the company’s general account and are credited with an interest rate that gets applied to the policy’s cash value.
A universal life insurance policy includes a cash value. Premiums increase the cash values, but the cost of insurance (along with any other charges assessed by the insurance company) reduces cash values.
Universal life insurance addresses the perceived disadvantages of whole life – namely that premiums and death benefit are fixed. With universal life, both the premiums and death benefit are flexible. Except with regards to guaranteed death benefit universal life, this flexibility comes with the disadvantage of reduced guarantees.
Flexible death benefit means the policy owner can choose to decrease the death benefit. The death benefit could also be increased by the policy owner, but that would typically require the insured to go through a new underwriting. Another feature of flexible death benefit is the ability to choose from option A or option B death benefits, and to change those options during the life of the insured. Option A is often referred to as a level death benefit. Generally speaking, the death benefit will remain level for the life of the insured and premiums are expected to be lower than policies with an Option B death benefit. Option B pays the face amount plus the cash value. If cash values grow over time, so would the death benefit which is payable to the insured's beneficiaries. If cash values decline, the death benefit would also decline. Presumably, option B death benefit policies would require higher premiums than option A policies.
Variable Universal Life Insurance
Variable Universal Life works in a similar way. Part of the premium goes toward the COI, and the premium in excess of all policy charges and premium loads is invested among several variable investment options and a fixed rate option. These variable investment options selected by the policyholder, each corresponding to an underlying fund with similar investment objectives, have the potential to grow the policy’s cash value.
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