Universal Life Insurance Investment

A universal life insurance investment is part financial product and part insurance product. The premium that is paid to the insurance company each month is split between the cash value account and the cost of providing the insurance. The amount that is applied to each changes over time as the policyholder ages.

One of the reasons people choose universal life insurance is because of the flexibility of the premiums. As long as the amount required for the insurance portion is paid when due, the policy cannot be cancelled. The policyholder has the option of varying the amount of the premium, which in turn varies the amount of the death benefit. But even if only the minimum amount is paid each month, the death benefit is always guaranteed.

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Younger investors in particular are becoming increasingly drawn to universal life insurance investments. The draw of a guaranteed return, guaranteed death benefit and the flexible payment options are often appealing in trying economic times. Yet, it's always wise to make sure that the policy will remain in force under any circumstances.

For example, the loss of a job may reduce cash flow and make it harder to pay the premium, even just the portion that covers the life insurance. This is why it's always extremely important to weigh both the investment and the insurance features to arrive at a policy that provides the maximum protection even during economic hardship. To lose the potential death benefit could be catastrophic for some families.

Consulting with a qualified insurance agent or Certified Financial Planner (CFP) may help to ascertain the best possible universal life policy for each individual. A CFP will be able to look at an investor's overall investment and insurance goals in order to determine how a universal policy will provide for the policyholder's family if and when the death benefit is needed.

Universal Life Insurance Investment Options

While the cash account grows tax-deferred until money is withdrawn, universal life insurance investments are chosen by the insurance company, not the policy owner. Most insurance companies will guarantee a rate of return each year on the amount that is in the cash account. One advantage of a universal life insurance investment is that the policyholder does not have to decide where to invest his or her money.

In other words, for investors who know little about investing or who prefer not to take financial risks, insurance companies often provide a safe alternative. While insurance companies must invest the premiums they receive in order to pay guaranteed returns, they rarely take huge financial risks. Further, they are required by law in all states to keep their own investments separate from client investments, and to keep at least a 1:1 ratio of liquid assets to potential claims.

The return that is guaranteed may be less than the return that could be gained on other investments if they were purchased directly. For example, the current return on US Treasuries is not very high, but they do offer safety. If a Treasury is paying 1%, the life insurance company may guarantee half of that, or .5%.

The balance goes toward paying administration, staffing and underwriting expenses. But, if the yield on Treasuries falls to an amount equal or lower than the rate guaranteed by the insurance company, there must be additional funds held by the company in order to pay the difference between the amount earned and the amount guaranteed.

Flexibility and a Universal Life Insurance Investment

Some universal life insurance policyholders choose to pay the premium out of the cash account. This can be useful later in life during retirement after a mortgage is paid and the policyholder is retired and on a fixed income. Some insurance companies even offer lower coverage amounts for those over the age of 50 and for juveniles. Grandparents who wish to purchase a universal life insurance investment for grandchildren often do so to provide for a college education, the down payment on first home or for estate planning.

Universal Life Insurance Investment and the Death Benefit

One of the most important features of a universal life insurance investment is the flexibility of the death benefit. The death benefit can be changed after the first full year the policy is in force, and can be changed once per year after that.

The death benefit can be either a level benefit or an increasing benefit. A level death benefit provides the same dollar amount regardless of when death of the policyholder occurs. Whether it occurs in year four or year 24, the amount paid to the beneficiary is the same. The value of the cash account is not part of the level death benefit and is not paid to the beneficiary.

A universal life insurance investment with an increasing death benefit provides the beneficiary with the amount that is in the cash account. If the investments have done well over a long period of time, this can provide a substantial amount of cash to the beneficiary. For example, if the coverage amount of the policy is $500,000 and the cash balance equals $100,000, the amount paid to the beneficiary will be $600,000.

An investment that gains even a modest amount over the life of the policy may be able to offset the loss of purchasing power due to inflation. And, while much is made of inflation and its erosion of purchasing power, the fluctuation of currency strength also plays a major factor in the increased cost of goods.

Choosing a universal life insurance investment policy with an increasing benefit will mean that the monthly premiums are more expensive. But, if the policy is purchased when the policyholder is young and in excellent health, he or she will more than likely get a great policy. And, the amount of the investment that compounds as part of a tax-deferred plan over decades, will likely create a nest egg that can either be cashed in, borrowed against or left to a spouse, child or grandchild.

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