What is Universal Life Insurance?
There are three main components of this type of policy.
The first aspect of the policy entails:
1. Death Benefit
A death benefit is payable to your beneficiaries via this policy, in the event of your death. There are two options as to how this benefit can be paid.
In the first option, you will choose a fixed death benefit amount which remains level (the same) for the duration of the policy. This is the amount that will be paid to your beneficiaries on the event of your death and is sometimes referred to as ‘level death benefit’ or ‘death benefit type A’.
The second option allows you to combine this fixed death benefit with the cash value of your policy. A final combined value will be payable to your beneficiaries, again on the event of your death. This is sometimes referred to as ‘death benefit type B’.
2. Cash Accumulation Portion
With Universal Life Insurance coverage, your Insurance provider will allocate a portion of your premium for investment. This is to provide a cash value that accumulates throughout the duration of the policy.
There are several strategies for investment – a popular example is ‘equity indexed universal life’ which enables your money to be invested on a major stock index, such as the S&P 500. This can sometimes be done with no risk of loss.
In order to protect your premium investment, many investment strategies will guarantee you a minimum rate of return – this is usually regardless of the market performance. If the market performs better than anticipated, often you will benefit by way of an agreed percentage of the gains, over and above the minimum rate of return.
3. Flexible Premiums
This is where Universal Life Insurance coverage differs from a Whole Life policy. With Universal Life Insurance the premiums can be flexible which means that providing the cost of the Life Insurance element is covered, you can reduce or increase your premium payments. This can typically be beneficial if your financial circumstances change.
With Whole Life insurance however, this facility is not available and the premium amounts will remain the same regardless of the economy or your personal financial circumstances.