LIFE INSURANCE
Universal Life
by Kiplingers.com
Last updated on March 24, 2003


Flexibility is universal's primary appeal. You can raise or lower the face amount with no need to rewrite the policy. You can, within limits, designate how much of your premium you want used for insurance and how much for investments. You can vary the premium payments. And, as with regular whole-life policies, you build up a cash value as the years go by.

Universal life offers yields on the cash-value portion that may be higher than those on basic whole-life policies. Guaranteed rates of return are disclosed in advance, and although they are generally low -- 4% or so -- it's possible to earn considerably more, depending on the company's own investment results.

The company calculates its own rate of return for universal policies each year or ties it to some financial index, such as the Treasury-bill rate. You get annual reports showing the amount of insurance protection you've got, the cash value of the policy, costs of the insurance, company fees, the amounts credited to savings from premium payments, and the rates of return on the cash value.

Picking the best universal policy

Universal life is a complex form of insurance requiring special vigilance as you compare policies.

Compare the sales fees. They vary quite a lot and are imposed in different ways. There may be a lump-sum deduction of several hundred dollars from the first-year premiums plus deductions from future premiums. You can reduce such loads by buying so-called low-load life insurance.

Find out how the rate of return is calculated and how long the initial rate is guaranteed. Check the projected cash value at the end of the first year and compare it with the first year's premium. Bear in mind that the advertised rates are paid on the money that's left after commissions, administrative expenses and the cost of insurance are deducted. The ads often don't make that clear. Moreover, some companies have paid less than advertised rates until premiums reached a certain threshold, such as $1,000. Size up the surrender charges. They can make canceling the policy especially expensive in its early years.

If a company sells more than one universal life policy, compare them carefully. Many companies sell two generic types. In one the death benefit is limited to the policy's face amount until the cash value has built up considerably over a couple of decades or so, at which time the cash value begins to be added to the death benefit. In the other option, the cash value is added to the face amount right from the start and the death benefit rises gradually as the years go by. The latter policy will carry higher premiums.

What Kind Should You Buy?

  • Term Insurance
  • Universal Life
  • Variable Life
  • Variable Universal
All contents © 2004 The Kiplinger Washington Editors, Inc.

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