Permanent Universal Life Insurance
Whole Life lacks flexibility-that's a pretty well-known fact. For example, there are some unsettling questions (for some people) concerning Whole Life. What if the insured can't afford to pay a premium? What if the insured wants to decrease the death benefit due to a life change that doesn't need that level of coverage anymore? Universal life alleviates those concerns.
Another issue with whole life is the fact that the inner workings of the policy are not required to be transparent to the owner. He cannot see the whole process of his Whole Life's day-to-day's policy. Thus, the insured individual might ask: What are the actual cost of insurance and expenses at the moment? "How much did my policy earn and where was it invested? Universal life usually makes all of these items fully transparent.
How Universal Life insurance is similar to Whole Life
Universal and Whole insurance are permanent policies. Their ambition is to provide for the policy holder's family when he/shedies, regardless what age that may be at. Universal Life also enjoys a cash value that will assist the insured to make uncertain insurance cost fluctuations as the policy-and the owner-matures.
How Universal Life contrasts with Whole Life Insurance
A universal life plan may be paid for with premium payments in several ways. A minimum amount of payment that is required to keep the policy active that is like the cost of an annual term insurance plan. Additionally, there are caps on the amount the insured is allowed to put into the plan's premiums, but the median between the low and maximum caps is sufficient for the vast majority of Universal Life policy holders.
With Whole Life, if the insured wants to surrender the cash value account and keep the insurance active, he/she has to use a loan. With UL coverage, the insured may still take a loan, but he may also opt for a straight withdrawal. The insured has to be cautious when he requests a withdrawal though; don't squander all of the cash value in the account. This will help cover the policy's costs and expenses.
A UL policy also must provide total disclosure. The insured is can view-unobstructed-what the costs and returns are for any time frame. Furthermore, he may decrease the death benefit anytime, but within predetermined limits. What's more, the insured can usually increase the death benefit on his coverage.
Death Benefit Options
Furthermore, the insured with Universal Life may not only decrease/increase death benefits once the plan is enacted, Universal Life also allows the insured choices between two death benefit options. These choices are commonly referred to as Option A Level / Option B Increasing.
Option A is lot like Whole insurance. As the cash-value increases, the level of risk (the amount the insurance provider is liable for when the insured dies) decreases. In Option B, the net amount at risk stays constant. Thus, the beneficiary receives the defined death benefit plus the cash value's worth.
Option B is obviously a little more expensive than A. This is because the insurer will have to payout to the beneficiary more of its money when the policy holder dies. The insured can sometimes switch between the two options, however. Nevertheless, while the insured may be able to switch from B to A with little hassle, he generally may only change from A to B if he's considered a good risk. Is he healthy; has he seen a doctor to ascertain his health condition? These are questions that the insurance agent will probably ask when the insured wants to switch from Option A to Option B. In general, the majority of consumers tend to use Option B, because they want to increase the amount that could be sheltered from taxes in a savings account.
The Cash Value Aspect
The cash value aspect of a standard universal-life plan is typically invested in debt early-on. The yields are typically near the three-year Treasury bill. (Refer to the Variable Universal Life Insurance of Virginia Cooperative Ext. pp. 354-147) The returns on a Universal policy have tended around the 4.5% mark. Many providers guarantee that earnings will drop to a predetermined level (usually a guaranteed 3% and no lower). The earnings will be tax free while they reside in the plan, giving the insured a sound way to grow savings without paying Uncle Sam.
About the premiums
Again, the insured can decide the amount of the premiums that he pays, within predetermined boundaries. However, it's strongly recommended that the insured pay more than the minimum required of premium amounts annually. A minimum premium payment will just meet the provider's expenses to cover the insured, and nothing will be earned cash value-wise. A good plan should have a suggested premium payment. This amount is the sum of the premium that the provider believes to be sufficient to maintain the policy as well as accumulate cash value.