What is universal life insurance

When people want to buy life insurance they either consider term life insurance or whole life coverage. However there is a third type of policy which is a combination of these two, known as universal life insurance.

The policy is known as universal life insurance because it is a type of permanent life coverage with additional features and benefits. It is a derivative of the whole life insurance and hence the two types of policies have many similar features. The cash value is accumulated in universal life insurance through premium payments.

One of the primary advantages of this type of policy is the flexibility that it offers in terms of the premium payments. Also it has greater potential for cash value accumulation and the buyer can change the policy to suit his requirements. To put it simply, the buyer is in control and decides the amount of premium payment that will go towards investment and the amount that will be allocated for insurance benefits. The investment part of the policy can also be increased at the buyer's discretion which can be availed of in case of financial adversities to make the premium payments. So universal life insurance offers dual advantage to the buyer where he can get protection as well as gain profit from the investments he makes.

Some of the advantages of this type of policy include:

Flexibility of Premiums: The buyer can pay less or more premium depending on his financial circumstances. This simply means that you could pay less and your policy will still be active.

Guaranteed Returns: The policy holder can be sure that he will receive a minimal return on cash investments regardless of the state of the market. On the other hand if the insurance company manages to rake in a profit on the investments, it will be passed on to the customer in the form of increased interest payment on the invested amount.

Flexibility of Protection: The customer can also choose the amount of money to be allocated for insurance protection. He can also increase or decrease the average but the increase is subject to the underwritten agreement.

Tax Free Payout: For most life insurance policies the death benefits are tax free.

Some of the disadvantages of this type of policy include:

Limited investment flexibility

Fewer benefits as compared to a whole life insurance policy and

Comparatively lower growth in cash value

Buyers should thoroughly research the terms of the policy before purchasing it. Many people have reportedly been cheated by insurance agents. Because universal life insurance pays higher commissions, many agents do not mind selling it as an investment tool. Any life insurance product that has a built in investment component can be complicated and it is best to seek expert advice before buying it.