Universal Life

Insurance companies are committed to fund death benefit claims as and when they occur. Therefore, they tend to use low-risk conservative investment styles in order to preserve principals and maximally guarantee returns. There are times, however, when the prevailing market interest rate is higher than those of insurance products. At times like these, investment public tends to move their capital resources from insurance products and invest in higher yielding assets elsewhere. To meet this challenge, insurance industry refashioned whole life policy into interest rate-sensitive policy. There are three types, namely: adjustable premium whole life, variable life and universal life. Among these three, universal life is the most popular interest rate-sensitive insurance product.
Buying a rate-sensitive policy requires the owner to share some of the short-term investment risks. For example: if the current investment returns have gone up then one of two things can happen, either the sum insured increases and the premium stays the same or the sum insured stays the same and the premium will decrease. And when the current yield goes down the adjustments to the premium and the sum insured will be made accordingly.
Premium is used to pay for the cost of insurance and other expenses in whole and term life. With universal, there is an investment aspect added. These three aspects are revealed to the policy owner (Called unbundling) so that s/he can make necessary changes in any of these aspects if there are good reasons to believe that those changes will positively impact the yield of the policy.
In my opinion, investment choices provided by universal life is quite limited. For someone serious about building wealth through investment, it is not the best way to invest. S/he would do better by opening an investment account with one of the brokerage firms.
Like whole life, universal life also has cash surrender value. Account value of the investment account in universal life forms part of cash surrender value. With whole life, cash surrender value becomes part of the contracted death benefit. Whereas with Universal life, the policy owner may choose to receive it in addition to the death benefit. There are four types of death benefits available with universal life. Each has its positives and negatives. Also, the size of premium depends on the type of benefit chosen.
I must add here that these are not the last words on the types of life insurance policies available out there in the market. Buying insurance is a long-term financial commitment. Therefore, one couldn’t possibly overemphasize more the importance of a good homework before making a decision.