Universal Life or UL as it is called is a type of permanent life insurance policy that has cash values like a whole life policy. It differs from whole life insurance in that the cash values are driven by short term interest rates. Based on this, the cash account values will vary and the owner takes on this risk of maintaining sufficient cash values to cover policy expenses. Because the cash values are driven by short term interest rates, it is known as CAUL, or current assumption universal life.
Unlike whole life insurance,which has many guarantees and is a very safe life insurance policy, Universal Life is tricky, risky and the premiums can be unstable. I typically stray from these policy configurations as most clients don’t like surprises.
UL premiums go into cash accounts and the cash increases by short term interest accruals. Administrative and mortality costs ( annual renewal term) are deducted from the cash account to keep the death benefit in force. If the premium and growth is not sufficient to cover the administrative costs, usually when we are older, the cash values begin to decrease. If things don’t change, the cash value depletes unless you increase your premium. Eventually, the cash runs dry and the policy lapses if premiums are not adjusted up. Although we see the annual statements, most people rarely look closely as this process unfolds.
The Universal Part
The premiums and death benefits are flexible and adjustable.
If interest rate performance is poor, premiums should be adjusted up to offset the lowered, anticipated cash values. If interest rates are good, premiums may be reduced. It is important to review these plans often to be sure they are properly funded.
The best way to do this review is with a competent, experienced life insurance agent who will run an in – force illustration for you. (Sadly, this exercise is rarely completed and this ignorance can create serious effects as we age.)
For more detailed information on UL, please see these articles: