What is a universal life insurance policy? With universal life, a cash value for the policy is established when the premium payments are greater than the cost of insurance each month. That cash value accrues interest from which is subtracted a cost of insurance (COI) charge, plus any other policy charges and fees, if no premium payment is made that month. Interest credit is calculated by the insurer based on prevailing interest rates.
Universal life insurance was developed from whole life insurance, and it retains similarities to whole life while affording the policyholder the possibility for higher cash value appreciation if the policy interest rates on offer are greater than the general account of the insurer (the general account is the basis of the cash value of a whole life policy). A difference is that miscellaneous charges and costs are known by the universal life policy holder, whereas with a whole life policy they traditionally are not divulged. Another difference is that with UL, you can treat your policy as a source of zero interest loans. There are limitations to this, and if your policy lapses after you have withdrawn money you will incur tax penalties.
With whole life, if the insured dies, the death benefit is guaranteed to be paid if all premium payments are made. With universal life, if either the premium payments or cash value of the policy falls below the cost of insurance then the policy will lapse, ie the insured will no longer eligible for the death benefit. However insurance companies will frequently add a guarantee that the policy will not lapse (ie ‘remain in force’) for a period of time, if premium payments were made for an amount of time specified in the policy, even if the cash value of the policy goes to zero.
Universal live is similar to a variable universal life insurance policy, or VUL; actually the latter was developed form UL. Variable universal life gives the insured the ability to be much more aggressive with the cash value of the policy. The insured can put the cash value into investments like stock or bonds, which would offer much greater return-as well as increased risks.
By the way, you may have wondered – what is group universal life insurance? – after hearing the term. It refers to the same thing as universal life, but forms part of a compensation package given to employees. And as you might guess, group variable life insurance is also offered as employee compensation by employers who are able to get reduced rates from insurance companies.