Universal Life Insurance

Universal life insurance, like whole life insurance, is a variety of permanent life insurance. As with whole life insurance, universal life insurance policies build a cash value through the portion of each month`s premium payment that is invested rather than paying for the cost of the insurance policy. Unlike whole life policies, the savings portion of a universal life policy is invested more aggressively in vehicles such as money market funds, bonds, and mortgage-backed securities; this leads to the likelihood of higher earnings. Universal life policies return interest to the policyholder instead of the dividends that they would receive through a whole life policy. The actual amount of interest paid to the policyholder can vary, but most insurers offer a minimum rate guaranty.

Another difference in universal life insurance is that the premium payments are flexible. Once the cash value of the universal life policy reaches a certain level, the policyholder can opt to reduce their premium payment or sometimes even skip paying for a year. This feature makes universal life insurance an attractive option for policyholders whose income is prone to variations from year to year; they have the assurance that they can still keep their insurance policy, but at a lower premium payment.

Unlike many other types of insurance products where the amount of coverage is determined when the policy is initiated and never changes, many universal life insurance policies offer the option to the policyholder to change the face value. This means that for example, if a child is born to the policyholder and they need more insurance coverage, they can change the value of their existing policy without having to take out a brand new insurance policy.

In a similar manner, a policyholder can choose to increase the amount of their premium payment to accelerate the increase in cash value. Once the cash value reaches a target amount, the policyholder may borrow against the value or even withdraw some of the cash that has accumulated within the policy. Eventually, a universal life policy could reach the point where the policy funds itself from the interest it earns, requiring no additional cash payment from the policyholder.