A universal life insurance policy, which is also known as 'flexible premium adjustable life insurance', is a life insurance policy, that has several indemnity provisions, that safeguards you and your family's well-being and future.
The concept of life insurance in the initial days involved a coverage against death. As per such policies, if the insured person passed away, a certain amount in the form of structured settlement, would be provided by the insurance company to the nominated family members of the deceased person, to ensure their well-being.
Today, the intention of insurance policy and the mechanism has been the same, however there are several hybrid policies that have come up in recent times to add to the features of the life insurance. After understanding its provision and purpose, we have mentioned some universal life insurance pros and cons, which will give you a better idea of this policy.
What is Universal Life Insurance?
As the name itself suggests, a universal life insurance is a policy in which the life insurance policy becomes universally applicable to the insured person, also known as the policy holder. The word universal denotes the fact that the policy does not have any specified time period or term and without you terminating it, the term goes on for life.
The mechanism of a universal life insurance policy is a bit different from the normal life insurance (in this case whole life insurance) policy. A universal life insurance policy can be divided into two parts.
The first part is the one that works exactly like a life insurance policy, where premium is to be paid to the company against a coverage that provides indemnity. The second part is a savings account, where a part of the premium gets deposited, and interest is accrued on it on an annual basis.
A very good aspect of the policy is that the premium amount is flexible and the coverage, varies as per the total of premium and the account. Apart from this facility, there are also some polices where premium is compulsory, but its actual volume differs as per the volume of the cash/savings account.
Thus, unlike other insurance policies, the coverage or protection can be provided from two sources, namely, the account and also the premium. This arrangement that provides a certain flexibility in the premium payment has its own pros and cons, which have been enlisted in the following paragraph.
Another prominent use of such instrument policies is that apart from the coverage, certain policies also provide repayments periodically after a certain number of years. This amount is always equivalent to the premium plus return on investment (interest rate).
Pros and Cons of Universal Life Insurance
While studying the pros and cons of universal life insurance, make sure that you take into consideration the terms and conditions of the policies that you are planning to take up. The insurance rates should also be considered. So here goes:
The first advantage is that it tends to provide a certain flexibility in the personal finances of the people. This proves to be of extreme benefit as the coverage extends for some specified number of years, even though no premium or very less premium is being paid.
The second prominent advantage is the gigantic coverage that is provided by the company. The coverage is gigantic in dimensions, namely, it is valid for life. The coverage finances are provided through two features, namely, the cash/savings accounts and the premiums that are paid to the company.
The third advantage is that several companies provide a certain return over premiums and finances which remain unused on a regular basis. The last prominent advantage is that the cash/savings accounts has some positive tax implications.
Compared to other insurance policies where there is no flexibility, you can pitch in more premium into universal life insurance policies and the account to ensure that you or your surviving family gets more returns in future. Fluctuating financial conditions, expiry of policies and non-payment of premiums are not exactly a hurdle to keep alive a coverage.
Just as advantages, there are disadvantages of universal life insurance policies. For starters, you need to keep the premium payments going on for a longer period. Owing to smaller premiums, the coverage values also decrease substantially. The returns provided by the insurance companies are not very small but, they are not exactly very substantial.
Certain insurance companies tend to have a minimum premium payment policy, where the premium though small, is a compulsory payment. In cases where you want to terminate the policy, there are certain charges that are deducted from the returns, and also from the cash/savings account.
As an overview it can be easily concluded that there are equal pros and cons of universal life insurance. Thus, it is advisable to go in for a policy, only if it suits you.