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Is universal life insurance the right option for you?

Monday, December 5th, 2011

Universal Life Insurance is a type of flexible permanent life insurance which offers low-cost protection that is offered by term life insurance along with a savings element, like in the case of whole life insurance. This savings element provides a cash value buildup. All these benefits as well as the premiums may be reviewed and altered when the circumstances change for the policy holder. Another significant feature in UniversalLifeInsurance is that the interest from the accumulated savings could be used by the policy holder to pay premiums.

UniversalLifeInsurance was mainly created to help provide more flexibility than what is presently being offered by whole life insurance. Here, the policyholder is allowed to shift money from the insurance and the savings component of the policy. The available premiums are broken down by the company into savings and insurance, thereby allowing the policyholder to make necessary adjustments based on their personal needs and individual circumstances. For instance, if the savings component is earning lesser returns, then it could be used up instead of utilizing the external funds to pay for the premiums. Here, the growth of the cash value is at a variable rate and is adjusted on a monthly basis.

How it works?

At Universal Life Insurance the policy is less rigid and the policyholder can make adjustments to pay up the premiums and with regard to the death benefits over the term of the policy. The cash value of the policy is also indicative of any decrease or increase in premium payments.

The company normally sets some boundaries on the adjustments. These monthly premiums should be able to sustain a basic benefit amount and also cover the cost of the monthly maintenance of the policy by the insurer.

These policies are also tied to short-term interest rates instead of the whole policy. Hence the rate of return would be quite high, but there would also be a greater risk when interest rates begin to fall.

This type of insurance is ideal for those policyholders who need flexibility as their financial needs keep varying from time to time. Adjustments can be made in the policy to suit the current circumstances without hampering the coverage itself. There may be some adjustments that require detailed examination.

Some pros and cons

Choosing the Universal Life Insurance policy has a lot to do with the timing. These are policies that earn interest based on the rates in the current money market. There are no minimum guarantees on the cash value savings on your policy.

Hence, the premiums as well as the cash value yields will fluctuate when there are changes in the economy or change in rate of interest. If the interest rate decreases then, in all likelihood you will have to pay higher premiums in order to maintain the policy.

But on an average, the cash value in these policies grow much faster and bigger when compared to the cash value savings on other whole life insurance policies. Hence, the bottom line is to weigh the pros and cons while investing in a policy.

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