April 20, 2018

Universal Life Insurance

Although traditional policies have served the needs of the public for many decades, more recently, several new types of life insurance products have been developed. These new life insurance products include universal life, adjustable life, and variable life insurance. Each has its own unique features but one commonality is flexibility.

Universal Life Insurance was the insurance’s answer to extremely high interest rates experienced in the 70′s. Traditionally, whole life contracts have earned 3.5-5% interest. In an effort to be more competitive, many insurers developed universal life products with relatively high interest rates (8-12%). Universal life insurance is a flexible premium, adjustable benefit type of life insurance.

Premium flexibility- the premiums are flexible, from a minimum amount specified in the policy, to the maximum amount allowed by the contract. The primary difference is that the universal life policy shifts some of the risk for maintaining the death benefit to the policy owner. In a whole life policy, as long as every premium payment is made, the death benefit is guaranteed to the maturity date in the policy, usually age 95 to age 121.

Most universal life policies are sold on the basis of the accumulation values and tax-deferred retirement income rather than on the death benefit. However, returns can fluctuate on basis of investment performance and interest rates. The universal life policy was designed for people who need flexible coverage over the course of their lifetimes.

Part of the premium goes to pay sales and administration charges (typically 7.5%). Additionally, two adjustments are made to the cash value account of a universal life policy, usually on a monthly basis. The first adjustment is a charge against the account to pay the cost of the desired insurance coverage. The second is a credit to the cash value account of interest at the current rate. The current rate consists of guaranteed interest (usually 4%) and excess interest earned by the insurer.

(Read more about the uses of universal life insurance…)

Universal Life Insurance Policies Offered by DFW Life Insurance:

Colony Term Universal Life Insurance by Genworth

Option A or Option B?

There are two options regarding the death benefit payable under a universal life policy. Option A provides a level death benefit equal to the policy’s face amount. As the policy’s cash value increases, the mortality risk decreases. Option B provides for an increasing death benefit equal to the policy’s face amount plus the cash account. Unlike option A, the mortality risk remains level. Thus, the policyowner will incur a higher expense for the cost of the death protection over the life of the policy and less of the premium will be deposited in the cash account.