Permanent Life Insurance / Universal Life Insurance

The universal life policy offers you more flexibility than the whole life insurance one. You can adjust the premiums you pay and the death benefit over the life of the policy. The cash value part policy will reflect the adjustments.

Here is how it works:

You pay premiums each month. One part of the premium goes toward your death benefit, another part covers the expenses of the insurer, and the rest enters the cash value of your policy. The cash value is invested by the insurance company and typically increases over time. The policy has a guaranteed minimum interest rate. If the current interest rates are higher than the guaranteed minimum, the cash value will grow faster.

Once enough cash value is accumulated, you can start adjusting premiums. You may decide to decrease or suspend premium payments as long as there’s enough cash value to support the policy’s death benefit and the insurer’s monthly expenses. Alternatively, if the cash value decreases, you may have to pay more in premiums. There’s a limit on how much your cash value can grow. According to the federal tax law, the cash value of life insurance can’t surpass the amount of the death benefit until the insured is at least 95 years of age.

There are two death benefit options you can choose from: level and increasing death benefit. With level death benefit, your beneficiaries get only the face value of the policy if you die, with an increasing death benefit they also receive the policy’s cash value. If you choose the level option, you can still increase or decrease the amount of the death benefit. To increase the death benefit, however, you’ll have to pass a medical examination.

Universal life insurance is appropriate for people with unstable financial status. If you expect your revenues and expenses to significantly vary over time and don’t mind the efforts required to manage your life insurance, get a universal coverage.

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