A Universal Life policy seems to be one of the most misunderstood policies...both by consumers and agents alike! One reason for this is that there are multiple types of Universal Life policies, and they are different from one another in key ways. Universal Life policies are designed around the cost of insurance and the ability to overfund the policy and grow a cash value inside of it. The cash value would grow based on an interest crediting strategy which could be a fixed interest declared by the insurance company, or by an indexed crediting method using the market indices (i.e. S&P 500) to credit a portion of the index growth to the account. As you age through time, the actual cost of insurance increases and the cash value in the later years (when the Cost of Insurance exceeds the premiums) is supplemented by using the cash value to pay the excess cost of insurance.
A traditional Universal Life policy had one basic guarantee in it, that is that a death benefit would be paid out if there was a cash value in the policy. Since you do not know when you will die, nor do you know the assumptions of the initial interest rates and how they will change over time, there was a need to review these policies more often to make sure that the assumptions made initially were modified appropriately to ensure the health of the policy. Sadly, the general life insurance agent force did not do this very well, and many Universal Life policies did not fare very well during a prolonged period of low interest rates over the last 20 years.
As the 2000's rolled in, the industry knew they needed to address this situation and they came out with a new version of the Universal Life policy. Whereas the traditional Universal Life policy had one guarantee, the new version added a second guarantee. This second guarantee was that if a specified premium was paid then the death benefit would be guaranteed. This meant that the cash value would not be as important as the premium in solidifying the death benefit. These policies have evolved since their inception to have little to no dependence on the cash value, and have become a sort of "permanent term" type of policy. Their premiums are less that the original Universal Life policies, but their death benefits can be guaranteed to up to age 120. The offset to this guarantee is that they do not build cash value, and therefore are limited n their use as an investment vehicle.
Traditional Universal Life policies can be very effective in generating cash vale when they are designed properly, and therefore can be used as an investment vehicle. An important note is that a life insurance policy can either be effective as a death benefit OR as an investment but cannot be effective at both at the same time due to competing interest inside the policies. If someone tries to tell you that one policy can be both of these things at the same time, seek other counsel and run away from them as fast as you can. A real professional will show you the goods, the bads and the uglies of what they are trying to sell you.
One very important note for those who already own a Universal Life policy: Have it REVIEWED! Many policies sold prior to 2010 may not have the guarantees that newer policies do. These older policies are known as "current assumption" policies and are very sensitive to interest rate fluctuations. Some policies may require additional premiums in later years to prevent them from lapsing. To determine if a Universal Life policy is appropriate for you, or to have your Universal Life policy reviewed contact one of our professionals today!
