Universal Life Insurance Policies
To understand what universal life insurance is, you need to know a little about the difference between whole life insurance and universal life insurance. With whole life, the life insurance policy remains in effect for the life of the insured person if premiums in a fixed amount are paid. The policy has both insurance and investment aspects. The insurance aspect pays a specified amount upon the death of the insured person. The investment aspect gives the advantage of carrying a certain cash value. The person insured can either withdraw the cash value or borrow against it, depending on the policy's provisions.
Universal life also remains in effect for the lifetime of the insured person, but has its unique advantages. The investment component is more flexible. The death benefit can be increased or decreased. After the first premium has been paid, the insured person can pay their premiums whenever they wish, in whatever amount they wish, subject to the conditions of the policy. Ordinarily, premiums are paid in the form of a single premium, fixed periodic premiums or a flexible premium. If the insured person has adequate cash value in the policy, they can even stop making premium payments.
With most universal life policies, the insured person can borrow against the policy. The insurer then charges interest payments to the insured person because it no longer receives investment income from the money loaned. Principal borrowed is generally not required to be paid back if all interest payments are current. The principal amount loaned is deducted from the cash value of the policy.
With many universal policies, the insured person can withdraw cash value rather than borrow against it. Withdrawals permanently lower the death benefit though. On the other hand, if the insured person doesn't borrow, they benefit because part of the premium goes into a cash account while returns on that account are tax deferred.
Given the cost of universal life as opposed to its benefits, people over 60 years of age might wish to look into term insurance instead. For a person starting out in a career, universal life might be an excellent choice. It's all up to the individual.
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