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What is Universal Life Insurance?

M.R. Anglin
M.R. Anglin

Universal life insurance is a type of permanent life insurance policy that allows the policy holder to build cash value on a policy. It differs from term life insurance in many ways. For one, it can build cash value that the policy holder can borrow, withdraw, or save. Another way it differs from term life insurance is by its length. While term life insurance may last 30years or so, most universal life insurance policies last as long as the policy holder pays the premium.

An attractive feature of the universal life insurance policy is the cash value that the policy holder stores up for himself. When the premium is paid, part of it is credited as cash value to the policy holder and when it isn’t, the cost of the insurance is deducted from the cash value. The account may also have fees subtracted from it. With many policies, no matter what happens, the company has to pay a minimum amount of interest that is fixed before hand. The amount of interest is subject to rise and fall according to various factors, but at least the minimum amount must always be paid.

Man climbing a rope
Man climbing a rope

Universal life insurance tends to be more expensive than term life insurance. This discrepancy is the result of how the premiums are calculated. As morbid as it sounds, life insurance costs are determined by how likely you are to die over the term of the policy so young person will usually pay a cheaper premium than an older person because young people are less likely to die during the course of the policy. Universal life insurance is usually permanent, and insurance companies take this fact into consideration when calculating the cost. The premiums tend to be higher but should remain the same over the life of the policy; thus, though someone may be paying more for insurance when he is younger, he should be paying less for insurance when he is old.

There are several different forms of universal life insurance available. Indexed life insurance pays interest on the cash value based on a particular financial index and usually offers protection in case the index falls below zero. Universal life insurance allows the policy holder to increase and decrease premiums as well as the amount of insurance. Variable universal life insurance offers all the benefits of a universal life insurance policy but also allows the insurance company to invest part of the premiums. Lastly, there is last survivor universal insurance policy which only pays money out when the two people covered on the policy have died.

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