What Is Universal Life Insurance?

By Lisa Olsen Posted in Life Insurance News

Universal Life Insurance Relies On Investments

Universal life insurance policies require you to make monthly payments towards the insurance. This is true of any life insurance policy. However, universal life insurance is different in that the life insurance company invests the money they receive in bonds, money markets and even mortgages. In return for the freedom with the money, they promise you will earn interest on the money you pay. If their investments pay off, the amount you’ll earn in interest can be quite high. If they fail, you’ll be earning a minimal amount.

How Monthly Premiums Are Calculated

Your monthly premium factors in a few things. Because your money is gaining interest, the insurance company will reduce the interest from your monthly payment. This changes the amount you owe from month to month. Administrative fees against the account will also affect your payment.

Setting Up A Universal Life Insurance Policy

When you set up a universal life policy, you have two options: A or B. The choice you make affects the money your beneficiary receives at death.

With Option A, your interest accrues over time. When you die, the company subtracts the amount of interest from the face value of the life insurance policy and sends the difference to your beneficiary. A policy with Option A costs you less in premiums.

Option B involves adding the amount you’ve earned in interest over the years to the face value of your life insurance policy. If your life insurance policy has performed well, the amount your beneficiary can be substantially more than the face value.

With either option, the premium you pay usually includes a “no-lapse guarantee.” This means that your premium amount will never change unless you pay your bill late or skip a payment. If that happens, you may need to re-enroll. Otherwise, you keep the same monthly premium until your 100th birthday.

Pros And Cons To Universal Life Insurance Policies

The biggest benefit to a universal life insurance policy is that the premiums are generally affordable. However, it also lulls people into paying the minimal amount and this may backfire over time. The amount in your account will not grow enough to make your interest worthwhile.

With some companies, if you do not increase the amount you pay, your account may lapse. This is especially true if the insurance company’s investments do not pay out as high as they did the month before. If your interest earnings decrease you will need to increase your monthly payment to cover the difference.

Related posts:

  1. What Is A Variable Life Insurance Policy?
  2. What Is Life Insurance?
  3. How Does Life Insurance Work?
  4. What Is A Tax Free Death Benefit For Life Insurance?
  5. When Someone Dies, Who “Owns” A Life Insurance Policy?

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