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Newsletter

2015 4th Edition (Other Editions)

UNIVERSAL LIFE INSURANCE

MIn most family situations, it is advisable to establish two funding programs before the establishment of any long-range investment program. These are:

This plan must be capable of paying lump sum expenses and providing a guaranteed income for one's family or spouse.

The advent of Universal Life Insurance plans combines a savings account and term life insurance policy. One plan achieves both a high interest deferred savings along with low cost term insurance.

These plans provide that emergency funds earn money market interest rates. The funds are also always readily available without penalty, with total safety. Any additions or withdrawals can be made as often as desired. In the event of death, all accumulations receive a stepped-up basis and are received by the heirs.

Any term life insurance you require is paid for monthly from these earnings. This further reduces the cost of this necessary protection. The insurance company's charge for this protection is extremely favorable, which results in insurance rates about 24% less than policies that are more conventional.

Universal Life Insurance contracts are designed so you may increase or decrease coverage at any time. You may also include coverage on spouse and children. Premium deposits may be increased or reduced, temporarily discontinued or even ceased. If a sufficient investment is in the account there would be no loss of coverage.

This means periodic purchases of new policies and unnecessary confusion have been eliminated. Annual statements of all costs, earnings and other factors are provided, adding to the merits of this type of program.

UNIVERSAL LIFE POLICY FEATURES

Universal Life is a life insurance policy with an adjustable death benefit and flexible premiums. Usually, the pricing is based on current mortality and interest assumptions.

A minimum premium is required in the first year. Thereafter, the amount and frequency of premiums are completely flexible. Each time a premium is paid, the company deducts its initial policy expenses or front-end loads. The remainder of the premium goes into the cash value fund from which insurance costs and expenses charges are deducted on a monthly basis.

If the owner is not making payments sufficient to cover the monthly deductions, the cash value will diminish. If it reaches zero and no payment arrives within two months, the policy will lapse. If the policyholder surrenders the policy, there may be a surrender charge or back-end load, which would be deducted from the surrender proceeds.

The cost of insurance is the insurance rate multiplied by the difference between the death benefit and the fund value (sometimes called the net amount at risk). The guaranteed maximum mortality rate is typically based on the 1958 or 1980 CSO Table; current mortality rates are generally lower. Most companies offer a discount for non-smokers.

Cash value funds are available for policy loans or partial withdrawals. Loaned values usually are credited with a different interest rate than that credited on unborrowed funds. With partial withdrawals, there is almost always an administrative fee, Generally, universal life policies offer a choice of two different death benefit options:

  1. The Death Benefit remains level
  2. The Death Benefit increases as cash value rises

In Option 1, as the cash value increases, the term portion of the death benefit (or net amount at risk) decreases.

In Option 2, each year the total death benefit is equal to the initial face amount of the policy. The total death benefit equals the sum of the specified amount and the unborrowed cash value.

For equal premium dollars, the first option, with level death benefit, provides more cash value accumulation; the second, with increasing death benefit, offers more insurance protection.

STRENGTHS OF UNIVERSAL LIFE

Outstanding flexibility. One may increase or decrease both premiums and death benefit. It expands and contracts as needed.

Underlying guarantees are the same as a whole life insurance: mortality, expenses and investment return.

Features unbundled costs; it is obvious what the company charges for each benefit portion. It is easy to evaluate the insurer's performance.

Investment performance is measurable, since the insurance company reports annually on the percent credited.

WEAKNESSES OF UNIVERSAL LIFE

Policy does require ongoing review to be certain it is meeting minimum and maximum guidelines.

Because of this policy's flexibility, the internal cost may be slightly higher than a whole life policy.

If rates of return fall after policy is purchased, adjustments in premium, face amount or cash accumulation must be made.