Universal life insurance is a type of flexible coverage that combines the low-cost protection of a term life insurance policy with a savings element that helps create long-term cash value, like with a whole life insurance plan. The benefits of a universal life insurance plan can be reviewed and changed as the insured ages and their needs change. To pay the premiums, the policyholder can use any accrued interest from the savings aspect of the policy, making it easier to maintain coverage after retirement.
Costs and Credits
There is bit more bookkeeping involved with a universal life insurance policy compared to other types of life insurance. Each month, the cash value of the policy is credited with interest to a savings account. The cost of the premium for the policy is debited each month, along with the cost of insurance charge and any other policy fees that may be involved. If no premium payment is due that month, the policy fees will still be deducted from the cash value of the policy each month.
Interest rates for the accounts are determined by the insurer. There is typically a set minimum of 2 percent that can be found in the policy documents. Interest rates can be tied to a stock or other financial index in the event of an “indexed” universal life policy. These types of policies generally guarantee level premiums throughout the duration of the policy and they generally cost less than a whole life policy.
Cost of Insurance
Universal life insurance typically costs more than term life insurance, but less than whole life insurance. The reason boils down to risk. The insurance is less of a risk than whole life insurance, but more of a risk than term life insurance. Therefore, the insurance company must charge more for universal life insurance than for term, but they may charge less than for whole life insurance.
Like whole or term life insurance, the cash benefit of universal life insurance can be used towards a variety of expenses. Beneficiaries can use the money to offset medical bills, pay for final expenses, pay off a mortgage or pay for an education. There are endless ways the money can be used.
Coverages are available at different levels. You should choose the level of coverage that is necessary to cover all outstanding debts, plus funeral expenses and enough beneficiaries to live on while they adjust to the loss of the insured.
Like other types of life insurance, universal life insurance will cost less for younger clients. The costs increase with age, and many seniors find themselves unable to afford this type of insurance.