Basics
Like whole life insurance, universal life insurance policies allow account holders to build cash value in their insurance policies that can be used at retirement. Universal life insurance, also referred to as flexible premium adjustable insurance, allows insurance companies to invest a portion of the premium. Common investments include mortgages, bonds and money market funds. A portion of the money made on the investments is returned to the insurance policy on a tax-deferred basis, meaning the account holder doesn't have to pay taxes on the capital until the policy is cashed in, usually at retirement when the tax burden is reduced. The policy usually carries a minimum return guarantee, usually of about four percent. Premium rates are guaranteed on universal life policies and cannot be raised as long as the premiums are kept up to date.
Options
There are two death benefit arrangements available on universal life insurance policies. One option pays the beneficiaries the face value of the policy at the time of the account holder's death. This includes the interest that's accumulated on the investments. The second option pays beneficiaries a pre-determined amount that's settled upon purchase of the policy, plus any added interest earnings. The second option is more expensive. Most universal life policies offer a guarantee that the insurance cannot lapse as long as the premiums are paid on time, until the account holder turns 100, or in some cases, 120. Policyholders can borrow from their universal life insurance policies, much like whole life insurance. These loans require no collateral or other qualifying requirements. The loan must be repaid to the insurance company however, with interest.
Features
Universal life insurance policies allow account holders to pay additional monthly payments. The minimum premium must be paid to keep the insurance in force, but additional funds can be added each month to build cash value and to increase the investments. The death benefit usually can be changed to accommodate changing needs. Premiums often can be lowered when the account holder encounters financial shortfalls to keep the policy active. At the same time, when premiums remain below a certain level for a long period of time, the policy can lapse. Account holders are apprised of the limits when they purchase the insurance. As an investment tool, universal life relies on the performance of the market, like most other retirement investments. If the insurance company invests poorly, the rate of return will be lower to the account. Unlike other investment tools, however, such as annuities and IRAs, there is a minimum guarantee attached to universal life accounts.
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