Posted: Jul 28 '11

How Does Universal Life Insurance Work

How Does Universal Life Insurance Work

Universal life insurance is the name given to life insurance that gives a person the option to build up a cash value.  Although different companies call these plans by a different name they are all a form of Universal life.

One of the features of all Universal life contracts is that you can make any deposit you choose between the minimum amount and the maximum amount for a given amount of life insurance.

For example if your policy has a death benefit of 500,000 dollars.  The minimum amount you must deposit is the amount that would cover the cost of the life insurance itself.  If the life insurance cost (called the mortality cost), was 3,000 dollars per year than the minimum you would have to deposit would be 3,000 dollars.  But this same contract would have a maximum amount you could deposit and that might be 8,000 dollars.

If you choose to deposit the 8000 dollars the insurance cost being 3,000 dollars, the difference of 5,000 dollars gets left in the cash value account.  When this cash value account has the 5,000 dollars you can then choose an investment option and interest from that investment option would be credited to your cash in the account.

If you had enough money in your account so the interest earning equalled the insurance cost you could stop your premiums and let the interest cover the cost and carry the policy.

By paying the minimum amount and covering the life insurance cost you have a level to age 100 term contract.

Although Universal life contracts are complicated they do provide a lot of benefits and options and once set up could be a big advantage in the future.

I would always suggest that you take the time and have the agent explain all the options because you might not use them all now but you might in the future.  Great contracts when set up right.

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About the Author - David Motkoski

David is a well-respected insurance advisor with over 30 years of experience helping healthcare professionals, business owners, and their families secure their financial futures. He takes the time to make certain his clients understand the life, disability, and health insurance products they are purchasing, so they can make the right choices for their budgets, plans, and futures. CONNECT WITH ME ON LINKEDIN