We are experiencing hybrids in every sector of our life, like hybrid fruits, hybrid animals and hybrid metals, etc. (no pun intended for hybrid sim slot in smartphones). So Life Insurance specialists declared that they too want to foray into this sector. So they created Universal Life Insurance which is basically a term life insurance infused with investment savings option. This option lets you choose what you want to do with the investment portion or saving portion of the premium. Most of these contain a flexible premium option.
How does Universal Life Insurance work?
Source : wealthmanagement.com
Universal Life Insurance consists of two components – a COI amount i.e. Cost Of Insurance amount and a savings component or cash value. The COI is the minimum amount that you need to pay to keep the insurance alive. It includes various charges like policy administration, mortality charges and other direct expenses. Premium collected in excess of COI is stored in cash value.
The COI amount will provide death benefits to your beneficiary whereas the cash amount is invested. The investment may end up having greater value than the premium portion of the policy. After paying for some years, the return from investment will match or even supersede the premium amount.
More about cash value of universal life insurance
Source : termlife2go.com
The cash value of investment will give you returns, either based on current market rate or minimum fixed rate, whichever is higher. Earnings can be transferred on FIFO or LIFO basis, depending on the terms of policy premium payment, at the beginning or at the end of the year. On the death of the holder, if any cash value is available, it will be retained by the company itself. Only the benefit value will be transferred to the beneficiaries.
Flexibility in premium payments
Source : topquotelifeinsurance.com
Unlike the normal Life insurance policies where premium must be paid monthly or quarterly or yearly, universal life insurance offers a flexible premium payment option to the holder. He can remit premium that exceeds the COI amount, which will create cash value. Once the interest from cash value is enough, he may not pay at all and the interest will be used to offset the premium amount. The holder must always pay attention to not take undue advantage of the cash value which may end up as him requiring to pay a higher premium amount than the original.
When to buy universal life insurance?
Source : giveuselife.org
With age, the premium required for the same policy rises drastically. So policies should always be availed in your twenties and thirties to get the most out of it. It will give you enough breathing space to recover your premiums without breaking any sweat. It is only going to cost more as the time progresses. If you invest in your twenties, you may well secure so much that you need not pay premium at all after 15 years. This will help you achieve something bigger that you always wanted to have, like a mansion or a luxury car. So the best option to be an early starter and reap the maximum benefits out of it.