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Universal Life Insurance: Benefits And Considerations

Potentially less expensive than whole life insurance, universal life insurance is designed to offer a lifetime of coverage along with a flexible premium and face amount. The cash value of a universal life policy is not credited on a guaranteed schedule, but according to the investment returns of the insurance company’s portfolio. Premiums can be calculated according to various assumptions about what these returns will be. If the assumed returns are higher, premiums can be calculated lower. Should the assumed interest rate not be attained, the policy may not generate enough cash value to offset the future costs of the insurance when you are older – requiring larger premiums to be paid. (Universal life policies do guarantee a minimum interest rate, however. If the premium is calculated according to that minimum, this should not be a problem.) Many universal life policyholders pay a higher premium than they have to at the beginning of the term in an attempt to offset future costs. A medical exam is usually required in order to qualify for this type of coverage.

A universal life policy provides greater flexibility than any other kind of life insurance policy. There is a broad range of premiums that can be applied to a given level of coverage. Premiums can be reduced or even stopped as long as there is enough cash value in the policy to sustain it. Face amounts can be changed at the policyholder’s option. The cash value is credited interest on a tax-deferred basis, and extra cash can be added to the policy to earn interest and then be withdrawn or loaned against at a later date. (Withdrawals and loans receive different tax treatments, however.)

A universal life policy will respond to changes in the general level of interest rates in the economy, whereas a whole life policy will not. Universal life insurance was invented in a time of high interest rates, and those high assumptions seemed to indicate that very low premiums could be paid and very high cash values could be achieved. When the interest rate environment changed, some of these aims could not be realized. But these changing circumstances did not invalidate the concept of universal life insurance.

Who Should Buy Universal Life Insurance? A universal life insurance policy is recommended if you want permanent coverage with cash value at lower premiums than you would pay for a whole life policy, and if you value flexibility in managing premiums and cash values. However, you must also be aware of the possibility that a) your premium may need to go up or b) the cash value of your policy might not reach your goals.

Guaranteed Universal Life Insurance. Guaranteed universal life insurance is a variation on the universal life theme. It provides lifetime coverage at a premium that is guaranteed to remain the same for the life of the policyholder – even up to the age of 121. To lower your premium, policy expiration may be set as low as the age of 90. Unlike regular universal life insurance, a guaranteed universal life policy is not expected to accumulate any significant cash value – so you may not be able to borrow against your policy or cash it out in the future. A medical exam is usually required in order to qualify for this type of coverage.

Who Should Buy Guaranteed Life Insurance? A guaranteed life insurance policy is recommended if you want permanent coverage with no cash value buildup at a premium that is guaranteed to stay the same for the life of the policy. Premiums are lower than they are for whole life insurance, but higher than they would be for a regular universal life policy.

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