Basics of a Universal Life Policy

The Basics of a Universal Life Contract 

THREE (3) components that make up a universal life policy: 

            Interest rates

            Coverage

            Scheduled premiums           

Under a universal life contract, each year the internal cost of the insurance premiums increases. When presenting a plan, the internal annual increase in premiums is taken into consideration.

Using a hypothetical example of an individual requesting $100,000 of coverage, using an interest rate of 5.0%, requesting a cash value at age 65 (or whatever age it is projected at) of $50,000. The “scheduled” premium hypothetically may be $1,000 a year. 

Based on the above scenario at some point in time the internal cost of the insurance may exceed the “scheduled” premium. If and when this occurs, the balance of the premium required to maintain the insurance coverage is deducted from the funds that have accumulated inside the contract. 

Calculating, using the above scenario, the “scheduled” premium is $1,000, but in later years the actual (internal) cost of the insurance may be $1,500.00. As long as the “scheduled” premium of $1,000 is paid each year AND THE INTEREST RATE REMAINS AT 5.0% AND THE CASH VALUES REMAIN IN THE POLICY, THE POLICY WILL CONTINUE TO PERFORM AS IT WAS PRESENTED, OR ILLUSTRATED. 

In the event the interest rates decline it may be necessary to increase the “scheduled’ premiums to maintain the scenario above. 

In the event the interest rates increase a reduction in the “schedule” could be considered to maintain the scenario above, or the “scheduled” premium of $1,000 could continue which in essence increase the anticipated and projected cash value of $50,000 at the age of 65 (or whatever age it was projected at). 

IN THE EVENT ANY OF THE THREE (3) COMPONENTS STATED ABOVE ARE CHANGED, OR IN THE EVENT THE CASH VALUES ARE WITHDRAWAN FROM THE POLICY, THIS WILL NOW REQUIRE A CHANGE IN THE “SCHEDULED” PREMIUMS. 

If a universal life plan is presented, illustrating loans or withdrawal, the “scheduled” premium illustrated for that plan will be sufficient, BUT ONLY IF THE INTEREST RATE ILLUSTRATED IS CREDITED AND NO ADDITIONAL LOANS OR WITHDRAWAL IS INITIATED OVER WHAT WAS ORIGINALLY ILLUSTRATED. 

Any loans or withdrawal will alter the performance of the plan. In the event a loan or a withdrawal is requested prior to the policy maturing as it was presented will require a NEW “scheduled” premium to be considered. 

A UNIVERSAL LIFE POLICY IS A FLEXIBLE CONTRACT. WHOLE LIFE OR TERM DOES NOT COMPARE WITH A UNIVERSAL LIFE POLICY. 

Universal Life is usually a contract that is utilized to provide more insurance coverage than a whole life policy would provide. Adjustments are made available under a universal life policy that is not available under a whole life or term policy.