Universal Life Insurance


Definition of Universal Life

Universal life insurance is a flexible permanent life insurance designed to offer the low-cost protection of term life insurance as well as the savings features of whole life insurance but with the growth potential of segregated investment funds.

Universal life insurance allows you to shift money between the insurance and savings components of the policy. For example, the interest from your accumulated savings can be used instead of external funds to help pay premiums.

It also gives you the flexibility of adjusting premiums and death benefits, along with the ability of choosing your own investments to match your risk profile throughout the duration of the policy.

This type of policy is comprised of two distinct components: the general account and the separate account. The general account is the reserve or liability account of the insurance provider, and is not allocated to the individual policy.

The separate account is comprised of various investment funds within the insurance company’s portfolio, such as an equity fund, a money market fund, a bond fund, or some combination of these.

All of the investment decisions within the policy are controlled by you, or perhaps with the help of an advisor. But ultimately the investment risk lies with you, and as a result, the death benefit value may rise or fall depending on the success of the policy’s underlying investments.

However, universal life insurance policies may provide some type of guarantee that at least a minimum death benefit will be paid to beneficiaries.

Some insurance providers also offer limited pay universal life options that typically span 10, 15, or 20 years. Premiums are paid into the policy up until the designated limited pay period, but you are still guaranteed lifetime insurance protection. Below are the main characteristics of universal life insurance:

  • Builds cash value.
  • Investment options.
  • Adjustable premiums.
  • More expensive to own.
  • Permanent insurance protection.
  • Loans are permitted against the policy.
  • Favorable tax treatment of policy earnings.

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