In order to compete with personal investments or to make insurance more acceptable and more competitive in the market, insurance instruments with increased participation in investment opportunities were created. In addition to the increased investment portion, the premium split is made as transparent as possible.
The result was called the universal life insurance, also called UL. It is an investment instrument rooted in an multi-year term life insurance, and the investment portion can be dynamically used for premiums as needed. Although it is a form of life insurance, the focus of UL is to create an investment instrument for the insured. The investment portion can be allocated in various ways, according to the wishes of the insured.
The transparency in how the premium is divided is the main selling point of UL. A fixed amount is for the insurance portion. The rest of the premium is for the investment and the insurance and other charges and fees.
Term Insurance Coverage
At the heart of UL is the insurance portion. In order to justify the cost of the insurance premiums, term insurance premiums are used. Term insurance premiums are listed and almost standard among insurance companies. Term insurance premiums are less than life insurance premiums. However, by definition, term insurance is for short-term coverage only. A common use of term insurance is to cover any shortfall until the insured can afford permanent life insurance. Another common use for term insurance is for insurance coverage which would be co-terminus with a loan or mortgage. The reason term insurance is inexpensive is because it does not have any cash value, unlike permanent life insurance. The premiums do not have any investment portion to cover the increasing cost of insurance as the insured gets older. This is the reason for the flat premium rates of permanent life insurance, the cash value builds up and covers for the increased insurance costs.
The UL has an annually renewable term life insurance. This means that the insurance costs increase every year based on a table of premiums for term insurance and the age of the client.
UL Investment Portion
The insurance portion is what keeps the clients continuing to pay their insurance premium payments. The investment portion is what makes the clients sign up for the package in the first place. Again, for the client’s peace of mind, the investment portion is kept transparent. Depending on the insurance package, the investment can be in publicly traded stocks, bonds, or other investment instruments. The investment returns can be set according to a basket of investment instruments or to an index of stocks.
Borrowing Against the Cash ValueLike most insurance packages with a cash value, you can borrow against your GUL. Because of the variable return in investment, the interest on your loan is dependent on the actual returns of the insurance. One difference between other types of permanent insurance loans, is that the insured does not need to repay the principal of the loan. However, the interest has to be paid regularly. If the interest is not repaid, this is taken out of the insurance’s cash value. This may erode the insurance if the loan is not repaid. The unpaid loan principal will be deducted from the insurance’s death benefit.
Uses of Universal Life
Like term insurance, the UL is a flexible instrument and can be used not just as a regular investment or instead of a permanent insurance. Other possible uses include:
- Keyman insurance. Signing up an insurance which will repay a company’s loan or business commitment in case the company or business transaction’s key person dies.
- Life insurance retirement plan. This can be used as a Roth IRA alternative. If for some reason a high-earning individual does not have a Roth IRA or is ineligible for it, he can sign up for a UL coverage. This then becomes a forced savings instrument which is protected from taxation and from estate taxes by the insurance portion of the plan.
- Executive perk or bonus. The company pays for the premiums, and the company executive pays for the income taxes due from the earnings of the investment.
- Loan or debt coverage. The GUL can be used to pay off the loan or mortgage in case the insured dies.