Grasping the basics of a Universal Life Insurance Policy is fairly simple, although the concept and its practical applications in individual financial planning can be quite complex and varied.
The scope of a Universal Life Insurance Policy is often stated by defining the policy as one that gains actual value during its life. In many ways, the Universal Life Insurance Policy might be viewed as an investment vehicle rather than a life insurance policy at all. For many policy holders, the life insurance element of the policy is almost secondary. It is the investment potential that is important to them.
This view of the policy is understandable when you take a close look at the exact dynamics of the life insurance concept. It has been stated, and with a bit of truth, that the life insurance policy can be compared to a wager between the company and the client. The wager concerns the life span of the client. The life insurance company is betting that the client is going to live to a ripe old age and the client is betting that he dies prematurely. If the client suffers an untimely death, he wins the wager.
Now, when it is viewed this way, the client certainly does not want to win. In fact, he has no way to win. If he lives his expected life span, paying his premiums the entire time until the “term” of the insurance expires, he has only the satisfaction that he provided protection to his family during this time, but it was protection that, as it turned out, he did not need. So, the idea of Universal Life Insurance gives the client a way to win. The premiums that are paid into the policy are actually investments.
The funds paid into the Universal Life Insurance Policy as premiums are invested in the manner of a retirement account or mutual fund. The earnings enjoy tax exempt status as long as the policy is in force and meets IRS guidelines. The earnings can eventually reach a point where they can be used to pay the premiums to keep the “death benefit” in force. In other words, the Universal Life Insurance Policy is taking care of the “protection” function of life insurance at the same time as it is serving as a viable investment vehicle.
The purpose of Universal Life Insurance Policy is simple. It is a policy that has the potential to increase in value in the same manner as a mutual fund while providing the basic “death benefit” protection at the same time. There is really no true downside to it except that it sometimes frightens clients who prefer things extremely simple and straight forward even if they are not in their best interests.
Aazdak Alisimo writes about
universal life insurance for UniversalLifeInsuranceCompanies.com.
