Review of Universal Life Insurance

Universal life (UL) is a variation of whole life insurance, characterized by considerable flexibility. Unlike whole life, with its fixed premiums, fixed face amounts and fixed cash value accumulations, universal life allows its policy owners to determine the amount and frequency of premium payments and to adjust the policy face amount up or down to reflect changes in needs. Consequently, no new policy need be issued when changes are desired.

Universal life provides this flexibility by unbundling, or separating, the basic components of a life insurance policy-the insurance (protection) element, the savings (accumulation) element and the expense (loading) element. As with any other life policy, the policyowner pays a premium. Each month, a mortality charge is deducted from the policy's cash value account for the cost of the insurance protection. This mortality charge also may include an expense, or loading, charge.

Protection Component of UL Insurance
As with term insurance premiums, the universal life mortality charge increases steadily with age. Actually, universal life technically is defined as term insurance with a policy value fund. Even though the policy owner may pay a level premium, an increasing share of that premium goes to pay the mortality charge as the insured ages.

Cash Values in UL Insurance

As premiums are paid and cash values accumulate, interest is credited to the policy's cash value. This interest may be either the current interest rate, declare by the company (and dependent on current market conditions) or the guaranteed minimum rate, specified in the contract. As long as the cash value account is sufficient to pay the monthly mortality and expense costs, the policy will continue in force, whether or not the policyowner pays the premium.

At stated intervals (and usually on providing evidence of insurability), the policyowner can increase or decrease the face amount of the policy. A corresponding increase or decrease in premium payment is not required, as long as the cash values can cover the mortality and expense costs. By the same token, the policyowner can elect to pay more into the policy, thus adding to the cash value account, subject to certain guidelines that control the relationship between the cash values and the policy's face amount.

Another factor that distinguishes universal life from whole life is the fact that partial withdrawals can be made from the policy's cash value account. (Whole life insurance allows a policyowner to tap cash values only through a policy loan or a complete cash surrender of the policy's cash values, in which case the policy terminates.) Also, the policyowner may surrender the universal life policy for its entire cash value at any time. However, the company probably will assess a surrender charge unless the policy has been in force for a certain number of years.

UL Death Benefit Options

Universal life insurance offers two death benefit options. Under option one, the policyowner may designate a specified amount of insurance. The death benefit equals the cash values plus the remaining pure insurance (decreasing term plus increasing cash values). If the cash values approach the face mount before the policy matures, an additional amount of insurance, called the corridor, is maintained in addition to the cash values, as shown here in option one.

Under option two, the death benefit equals the face amount (pure insurance) plus the cash values (level term plus increasing cash values). To comply with the tax code's definition of life insurance, the cash values cannot be disproportionately larger than the term insurance protection.