Universal Life Insurance: Protection both Before and After Retirement

Universal Life Insurance is a type of flexible permanent life insurance that can give you the high face value of a Term policy with a premium much lower than you would get in a whole life policy, depending on your age. (For a person in his/her 20s, a whole life can actually be cheaper than a universal, depending on how it is structured.) The reason many people never purchase universal life is that when they ask their agent, “what is universal life insurance,” they are often given a universal life insurance guide that has been approved (in all its complex language) by the State’s Department of Insurance but that does little to help a person truly understand the advantages. Unfortunately, many agents who have been trained to sell only Term Life or Whole life do not understand themselves just how to explain Universal Life insurance. get a quote »

Universal Life insurance is a form of “permanent” insurance, but is not considered “whole” life. It is more correctly termed “flexible premium adjustable life.” Simply put, you pay your premium into a special savings account called the “accumulation” fund. Into that fund, the company adds interest. Out of that fund the company takes the cost of insurance and applicable fees. Once you have cash built up in the fund, there is no particular premium that you absolutely have to pay as the costs will come out of the accumulation fund. Once the fund is close to being depleted—in other words, there is not enough money left to pay the fees for the following month—the company will notify you that you need to begin paying premiums or the policy will lapse.

While there is no such thing as “universal term life insurance,”—since by definition a UL is a form of permanent insurance—it is possible to fund a universal with a very small premium and have it work as if it were a term. In other words, you would pay a premium that would build cash for a few years, and when the cost of insurance for your age caught up to the premium, the policy would simply be supplemented with money from its own savings. In this way, the policy would run out of money in 10 to 15 years.

The more usual way to fund a Universal Life policy is to use something known as the “target premium.” Depending on your age, target could build the policy for 20 to 30 years or more with no need for additional premium, especially if it is structured to endow at age 100. If, however, you want maximum flexibility with the potential for additional income after retirement, you will want to fund it on the “modal” premium. This is known as “over funding” the policy, but it provides you with the maximum opportunity for building the savings fund. Remember, just because you have money in the savings does not mean the company will take more to pay for the insurance itself. The more you have in the savings—up to certain federal limits—the more interest will be paid and the more quickly you will build your accumulation fund. And, while Universal Life is not a “20 pay” or any other kind of “paid up” policy, if you fund it properly, you could reach a point where the policy continues to grow as well as pay its own fees without any additional premium from you. This is truly an attractive option for the savvy investor.