Understanding Universal Life Insurance Policies

A Universal Life Insurance policy is completely different than a term life insurance policy. It's considered both a life insurance product and investment portfolio item for policyholders. Some suggest that a Universal Life Insurance policy is too new to be determined reliable, but the traditional Universal Life policy, combining term insurance with an accumulation fund has been around since the 1970s. The purpose of Universal Life Insurance was to help insurance carriers compete for those lost dollars invested in the market by consumers who began moving away from whole life policies to term life policies due to inflation eroding away the value of the policies and the inflexibility of the whole life policy to allow consumers to change anything about their plans.

During that same time, the market and consumers began seeing other problems associated with whole life policies, as when policyholders took out loans more often than the plan designers anticipated. This reduced the returns of whole life policies, as the low-interest loans drove down the overall value of the whole life policies and prevented the carriers from benefiting in higher yield investments, due to the lack of sufficient cash flow required by these higher-yield opportunities. However, as rising inflation in the 1970s resulted in an increase in salaries as well as tax rates, many people appreciated the tax advantages of a life insurance product, but were concerned about the posted returns and inflexibility of whole life policies.

As a result, the Universal Life Insurance policy was born to compete aggressively with term life policies and the various investment options available to consumers. Obviously, the policies are set up like any other investment, with the greater the risk, the greater the reward. As such, single or fixed premium policies are generally among the more stable, least aggressive plans and have a more limited ability to gain a sizable investment return on top of the death benefit, whereas a variable, flexible payment plan offers more flexibility, higher potential for risk, and greater reward possibilities.

With any of the Universal Life Insurance plans, the policyholder pays a premium. This premium can be any amount desired, from the minimum set by the insurance company to the maximum amounts permitted by tax law. From there, the policyholder decides the degree of flexibility and risk and return desired in the plan and can pick a single premium, fixed premium, or flexible premium plan.

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