The Universal Life Insurance Plan structure
Universal life insurance plan is a type of permanent plan that combines life insurance with an investment component. It allows the policy owner to decide if and how much to contribute towards the investment part. It also allows the owner choose investments from a given selection of funds.
The cost of insurance is fixed and guaranteed. Any contribution above the cost of insurance can be used to invest in those investment funds. Investment fund are subject to the market fluctuations just like other mutual funds or segregated funds.
What is the benefit of investing inside an insurance policy?
The main benefit for the funds invested in the insurance plan is that any growth is sheltered from the taxation. When the insured person dies the death benefit including the growth on the investment funds is paid tax free to the beneficiary. Other ways to get access to the investment fund will be discussed later in this article.
Cost of insurance in the Universal life insurance:
level Cost of insurance:
Level cost of insurance is guaranteed to stay the same for the life of the insured. There may also be a quick pay option that can guarantee to pay off the policy in 10 years or 20 years. After the quick pay period the policy will continue to cover the insured person without any further premium requirements. One may decide to pay more than the cost of insurance to contribute to the investment component.
Yearly renewable term cost of insurance:
YRT cost of insurance can be lot cheaper at the beginning and then it will keep increasing a predetermined amount every year. This method can offer significant growth opportunity in a bullish market environment.
Investment opportunity in Universal life insurance:
Any funds you pay above the cost of insurance is invested into the funds you choose. The investment portion is allowed to grow subject to market conditions and type of investments chosen
The equity inside the policy can allow the policy owner to take a break from paying the premium. Depending on how large a balance is accumulated in the fund account, one may be able to stop paying for the rest of life of the insured. But the increasing cost of insurance in the later years can be a significant drain on the investment component. Also if the market conditions cause the fund value to drop, that can also trigger the need for more contribution to sustain the policy.
Access to cash value in case of Disability
Most of the insurance companies allow access to the cash value built up in the policy in case of a major disability. That access to the cash value is allowed without any tax implications.
Other resources and links
Here is a link to some more information about Universal life plans.
Universal life policy is a great way to protect your loved ones for the long term. But some of the people with lower income may not be able to afford the cost of a permanent plan. Also they may not have much money for investing in the policy. For those with a smaller budget often times a term insurance policy is the only practical solution for the short term. They may have a need for a large sum of insurance because of young family and other liabilities like having mortgage payments etc. This page discuses term insurance in more detail.