Universal life insurance brings in a third dimension to the insurance sector, which is predominantly ruled by the two big dimensions, namely whole life and term life. It is almost a perfect blend of the whole and term policies. Therefore, before making the decision of whether to go for a whole life or a term life insurance quote, every insurance shopper must consider the possibility of the universal life insurance policy meeting his or her needs.
The late 1970s saw the birth of the universal life policy, which was introduced to make the policyholders retain their cash value in their policy. Otherwise, customers would withdraw the cash value of the whole-life policy and put them in CDs, as the latter were generating more interest income than the former. With universal life policy, the interest rate of the cash value was set to be interest rate fluctuations sensitive.
With this policy, you pay the premium, which is allotted into different pots, namely cash value, administrative charges, premium loads, and Cost of Insurance Charge (COI). The cash value generates interest. The policy provider determines the insurance life rate of interest on cash value, which is variable. However, there is a guaranteed minimum rate. The Cost of Insurance Charge increases with the age of the policyholder. However, ideally, the cash value interest is believed to increase at a faster rate to make up for the COI.
Some of the advantages of the universal life policy are as follows.
• Permanent protection for life
• Low risk cash value
• Tax-deferred cash accumulation
• Interest on cash value at market rate
• Accumulated cash withdrawal or borrowing option
• Flexibility in premiums
• Flexibility in sum assured
The most attractive feature of the universal policy is its flexibility in premium payments. Based on your financial situation, you can choose to pay more or less premiums. If you wish to pay only for a shorter period of time, you can choose to make larger premiums and be done with your responsibility sooner. If you are facing a financial crunch and would like to skip payments for a brief period, you can do that. If the interest rate rises, you can reduce your premium amount. On the other hand, when it decreases, you might have to increase your premium amount. As your needs changes, you also have the option to decrease or increase your sum assured.
Some of the disadvantages of the universal policy are as follows,
• Account is not flexible.
• Cash value accumulation is not guaranteed.
• Policy is not guaranteed to be in effect, in the absence of sufficient premiums.
The risk associated with the no guarantee policy is considered to be a huge one by many. The mortality risks and volatility of the interest rate are borne by the policyholder. This shift reduces the risk for the policy provider, which in turn reduces the cost of cover for the owner. As long as the COI and interest rates balance each other, the policy is guaranteed. If not, the cover becomes really expensive for the owner. In the worst case, the death benefit could be lost.
There are three types of universal cover namely, fixed premium, flexible premium, and single premium. As their names indicate, they allow fixed period of payment, flexibility in payment and onetime payment. Universal policy needs to be, in effect, for at least fifteen years to qualify for returns. It is best suited for those who require coverage even into their 70s. The cash value of the coverage is a good investment vehicle. However, those not requiring coverage for that long are better off with a term policy as a cover and a separate 401K account as an investment.
The late 1970s saw the birth of the universal life policy, which was introduced to make the policyholders retain their cash value in their policy. Otherwise, customers would withdraw the cash value of the whole-life policy and put them in CDs, as the latter were generating more interest income than the former. With universal life policy, the interest rate of the cash value was set to be interest rate fluctuations sensitive.
With this policy, you pay the premium, which is allotted into different pots, namely cash value, administrative charges, premium loads, and Cost of Insurance Charge (COI). The cash value generates interest. The policy provider determines the insurance life rate of interest on cash value, which is variable. However, there is a guaranteed minimum rate. The Cost of Insurance Charge increases with the age of the policyholder. However, ideally, the cash value interest is believed to increase at a faster rate to make up for the COI.
Some of the advantages of the universal life policy are as follows.
• Permanent protection for life
• Low risk cash value
• Tax-deferred cash accumulation
• Interest on cash value at market rate
• Accumulated cash withdrawal or borrowing option
• Flexibility in premiums
• Flexibility in sum assured
The most attractive feature of the universal policy is its flexibility in premium payments. Based on your financial situation, you can choose to pay more or less premiums. If you wish to pay only for a shorter period of time, you can choose to make larger premiums and be done with your responsibility sooner. If you are facing a financial crunch and would like to skip payments for a brief period, you can do that. If the interest rate rises, you can reduce your premium amount. On the other hand, when it decreases, you might have to increase your premium amount. As your needs changes, you also have the option to decrease or increase your sum assured.
Some of the disadvantages of the universal policy are as follows,
• Account is not flexible.
• Cash value accumulation is not guaranteed.
• Policy is not guaranteed to be in effect, in the absence of sufficient premiums.
The risk associated with the no guarantee policy is considered to be a huge one by many. The mortality risks and volatility of the interest rate are borne by the policyholder. This shift reduces the risk for the policy provider, which in turn reduces the cost of cover for the owner. As long as the COI and interest rates balance each other, the policy is guaranteed. If not, the cover becomes really expensive for the owner. In the worst case, the death benefit could be lost.
There are three types of universal cover namely, fixed premium, flexible premium, and single premium. As their names indicate, they allow fixed period of payment, flexibility in payment and onetime payment. Universal policy needs to be, in effect, for at least fifteen years to qualify for returns. It is best suited for those who require coverage even into their 70s. The cash value of the coverage is a good investment vehicle. However, those not requiring coverage for that long are better off with a term policy as a cover and a separate 401K account as an investment.