Glossary
Universal life insurance, defined
A permanent policy that separates the death benefit from the savings component and lets the owner vary the premium within limits. Each payment goes into a cash value account; the insurer deducts the monthly cost of coverage and expenses from that account and credits interest on the balance.
In practice
Flexibility is the point and the trap. Paying more than the cost of coverage builds cash value that can carry the policy through years when the owner pays less or nothing. Paying only the minimum for years, while the insurance charges rise with age, can drain the account and lapse the policy late in life, when replacing it is expensive or impossible. The interest credited has a guaranteed minimum, but the rate illustrated at sale is not a promise. Ask for an in-force illustration every few years and compare it with the original.
A worked example
Suppose a forty-year-old buys a policy with a $500,000 death benefit and a planned premium of $400 a month. In the early years the cost of coverage might be $100 a month, so $300 a month plus interest accumulates as cash value. Suppose she later pays nothing for two years during a job change; the monthly charges are drawn from the account instead, and the policy stays in force as long as the balance lasts. Hypothetical figures.
Applies to: Life Insurance