Universal Life: Flexibility when you need it most

Universal life (UL) could be thought of as a marriage between Term life and Whole life insurance. It is completely flexible, allowing you to add or withdraw funds, skip payments, or adjust the face value, although increasing the face value may require proof of insurability.

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A UL is an attractive option for some people because it can be funded so that it provides a reliable death benefit that will last to age 100, and, while more expensive than Term, it is usually much cheaper than whole life. And, unlike Term, it does build a cash value. As a matter of fact, what is referred to as "cash value" in a whole life policy is often called "account value" or "accumulation value" in a universal.

It is important to understand that a UL is not only flexible from the client's perspective, but also from the company's view. You will be paying premium—which you can adjust at will—for a face value which you can also adjust. The company will be paying interest on your money, at a rate that can go up or down with the economy, and will be taking enough out of your account each month to pay the cost of insurance (COI) and fees. The cost of insurance is based on your age and on the mortality tables. Over time, your cost of insurance goes up, but in the past 30 years the mortality rates have gone down. In other words, people are living longer, so it costs less to insure an 80 year old today than it did 30 years ago.

Agents sometimes explain a UL with a picture of a bucket that has a hole in the bottom. Each month your premium and compounded interest paid by the company goes into the top of the bucket. At the same time a small amount to pay the COI and the fees leaks out through the hole at the bottom. Initially, you should be putting enough premium into the bucket so that when the "hole" gets bigger due to your advancing age, the COI and fees will still not exceed the premium plus interest.

Keep in mind the following points when purchasing a UL.

• The UL is completely flexible from both your standpoint and the company's.
  

• You will receive an annual statement telling you what your account value has reached. Do not ignore the annual statement. If you don’t understand it, call the company and ask for an explanation.
  

• UL policies can have riders just like whole life or term. However, each rider will have an impact on the growth of the account value.
  

• Taking a withdrawal from the account value WILL impact the "bottom line," that is, the amount of premium you will need to pay to keep the policy in force for your entire life. Don't take cash out and just assume everything else will stay the same. It won't.
  

• Most companies show a guaranteed illustration and a non-guaranteed one. The guaranteed illustration shows you the very least you can expect from the policy if (1) interest rates drop to the lowest allowable by law and (2) cost of insurance increases similarly. The guaranteed side is not actually possible unless these two factors are true from the day of the very first premium payment. The non-guaranteed illustration is based on today's interest rates and COI. You can expect those to change, which means the actual performance of the policy will be better than the guarantee, but probably not quite as good as the assumed or non-guaranteed.
  

• Ask your agent to help you "overfund" the policy in such a way that it either endows or the account value actually begins to exceed the original death benefit. To "endow" simply means that at age 100, the death benefit and account value are both equal to the death benefit.

Universal life can be a very affordable option to those who want more security than Term, are willing to monitor the performance of the policy, and would also like the option of cashing it out and investing the accumulated funds at some point.