What's New about Universal Life Insurance - Part 1

Universal life brought a brand-new chassis to the life insurance industry that has changed life insurance forever.

The unique features that universal life brought are:

. Complete transparency. You, the policy owner, are shown the specific expense charges, the costs deducted for the amount at risk (the life insurance), the specific account value, and the amount of interest that is being paid on that account value. This was a revolutionary change in the makeup of life insurance that did not exist in the other investment-oriented life insurance available at the time, whole life and fixed-premium variable life. Up until that time we all knew that the ingredients necessary for creating an investment-oriented life insurance were (1) cost of life insurance, (2) expenses, and (3) investment capital, but none of these has ever been quantified. The fixed-premium, fixed-face-amount policies of the day did not specifically identify each. They were and are, in effect, black-box types of policies. It is this very transparency that allows for the following features of universal life.

. Ability to vary and skip premiums. Since the policy owner can see the expenses, it is easy to identify the minimum amount that can be paid into the policy in order to keep it in force. The maximum amount that can be put into a policy is stipulated by Section 7702 of the Internal Revenue Code. The insurance company will provide the policy owner with the actual amount of the maximum that can be put into the policy.

. Flexibility of death benefit. H the policy owner wants the insurance company to increase the amount at risk (life insurance), all that is needed is evidence of insurability (medical, personal, and financial) of the insured, and the payment of the increased costs of insurance (COIs). A decrease in the amount of life insurance, or amount at risk, merely requires a request, and the COIs will decrease with the decrease in coverage.

. Death benefit options. A policy owner may have the death benefit option for whole life, in which the total death benefit is a set amount. At the insured's death, the beneficiary is paid that contracted amount, and the death benefit is made up of the amount at risk at the time and the cash value or account value. This is most commonly referred to as option A or 1. Alternatively, the policy owner may stipulate that the amount at risk is not to decrease as the cash or account value increases. At the insured's death, the death benefit is to be the entire, originally contracted for, amount at risk plus the account value at the time of death. This is most commonly referred to as option B or 2.

. Right to withdraw account value. Prior to the existence of universal life, the only way for a policy owner to get money out of an ongoing policy was to borrow it. That is, the policy owner would ask the insurance company for a loan using the policy as collateral. The insurance company would lend the money, usually at 5 to 8 percent interest, and put a lien against the policy until the loan was paid off. If death or policy termination occurred prior to the loan being paid off, the insurance company would subtract the amount of the loan, plus any interest owed, and payout the balance. In policies that have dividends­participating policies-the dividend credits always can be taken out in cash. Universal life, on the other hand, allows a policy owner to borrow or withdraw account value at the policy owner's option.