Term Life Insurance Articles
Understanding How Universal Life Insurance Works
2011-11-08
Selecting the most appropriate type of life insurance is more than simply calculating coverage requirements and shopping for price. Today, it can be a wise investment. Universal life insurance is a perfect example of this reality.
Universal life insurance is a form of permanent coverage that is based on the premise of increasing cash value, similar to but more flexible than traditional whole life insurance on which it was originally based. A portion of the money that is paid into the policy over time, and which is above the minimum premium amount which is mandatory, is invested by the company. Generally, these investments consist of bonds and money market funds. Mortgages have also been a common option. The profits, if any, are distributed between the company and the policy holders, making the process a mutually beneficial endeavor.
Unlike whole life insurance, the policy holder is not restricted by hard payment amounts or schedules. He has the options of paying regular premiums as billed, paying more or less than the billed amount or paying nothing at all at the time of billing. The one overarching criterion is that what payments are made, must meet the minimum management costs of the policy. All payments are credited to the cash value of the universal life insurance policy which realizes interest on a monthly basis. The amount of that return is predetermined, fixed and guaranteed. If no payment is made into the policy during a given month, all costs of insurance and other pertinent fees are charged to the account. As cash value increases, the cost of the policy decreases.
This is after all, life insurance, so calculating coverage requirements is important. There are two types of death benefits available. One alternative pays the beneficiary on the basis of the accumulated cash value of the policy. Because this option relies on the insured's own cash for payment of benefits rather than the company's money, it costs less. The second alternative pays benefits based on cash value plus the face amount of the policy, and therefore, it costs more. In either case, the value of the death benefit can be adjusted upward or downward by request.
Being a form of permanent insurance, a universal life insurance policy with a non-cancellation clause can remain in effect to the insured's age of 100 or longer, provided that minimum payments have accrued. For the universal life insurance system to work as envisioned for the policy holder, both as an investment and as basic life insurance, it is to contribute more than the minimum requirement to the policy. The larger the contribution, the greater the amount on which interest is paid and profits distributed.
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Selecting the most appropriate type of life insurance is more than simply calculating coverage requirements and shopping for price. Today, it can be a wise investment. Universal life insurance is a perfect example of this reality.
Universal life insurance is a form of permanent coverage that is based on the premise of increasing cash value, similar to but more flexible than traditional whole life insurance on which it was originally based. A portion of the money that is paid into the policy over time, and which is above the minimum premium amount which is mandatory, is invested by the company. Generally, these investments consist of bonds and money market funds. Mortgages have also been a common option. The profits, if any, are distributed between the company and the policy holders, making the process a mutually beneficial endeavor.
Unlike whole life insurance, the policy holder is not restricted by hard payment amounts or schedules. He has the options of paying regular premiums as billed, paying more or less than the billed amount or paying nothing at all at the time of billing. The one overarching criterion is that what payments are made, must meet the minimum management costs of the policy. All payments are credited to the cash value of the universal life insurance policy which realizes interest on a monthly basis. The amount of that return is predetermined, fixed and guaranteed. If no payment is made into the policy during a given month, all costs of insurance and other pertinent fees are charged to the account. As cash value increases, the cost of the policy decreases.
This is after all, life insurance, so calculating coverage requirements is important. There are two types of death benefits available. One alternative pays the beneficiary on the basis of the accumulated cash value of the policy. Because this option relies on the insured's own cash for payment of benefits rather than the company's money, it costs less. The second alternative pays benefits based on cash value plus the face amount of the policy, and therefore, it costs more. In either case, the value of the death benefit can be adjusted upward or downward by request.
Being a form of permanent insurance, a universal life insurance policy with a non-cancellation clause can remain in effect to the insured's age of 100 or longer, provided that minimum payments have accrued. For the universal life insurance system to work as envisioned for the policy holder, both as an investment and as basic life insurance, it is to contribute more than the minimum requirement to the policy. The larger the contribution, the greater the amount on which interest is paid and profits distributed.
