Understanding Life Insurance

Universal Life Insurance

Life insurance companies developed universal life insurance, in part, to provide a method of taking out permanent coverage with premium costs comparable to term life. They also developed universal life as a method of creating tax-advantaged savings. Universal life consists of two elements: the cost of insurance (COI) and the cash value (CV). Unlike term insurance, which has a level premium, universal life has a COI that increases each year. Over many years, the premium increases a great deal, especially as the insured reaches certain age brackets. Most policyholders avoid having to pay the higher costs out of pocket because they contributed to the CV in addition to paying the COI. The CV continued to grow over the years through contributions and by earning interest. This CV can then be used to pay the increased COI. Often, enough CV accumulates in the policy to allow the policyholder to skip payments; however, if the CV falls to zero, the policyholder must pay the increased premiums for the policy to remain in force.

Keep going to learn about whole life insurance.