Defining Universal Life—A hybrid of a Term and a Whole Life Policy

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Universal Life Insurance is the solution for those who want something more permanent than Term Life, but can't afford a Guaranteed Whole Life Policy. The premium will be more than Term, but often much less than Whole Life. Plus, you have the flexibility to pay a smaller premium to start with—if you need to—and increase the premium later when your financial situation improves.

Universal life definition
Universal life is a cross between Term and Whole life. It is an annually renewable term with a savings component. The premium is a combination of the cost of insurance, applicable fees, and the additional amount you choose to put into it to ensure that the savings portion will continue growing as long as you live. If you can visualize a large bucket with a hole in the bottom, you will understand Universal life. Each month, your premium plus interest are poured into the bucket from the top. The speed with which the bucket fills depends on how much you pay over the amount required to pay the cost of insurance.

The cost of insurance and fees trickle out through the hole at the bottom of the bucket. This hole gets bigger as you get older. However, if you fill the bucket full enough in the early years, the hole at the bottom will never get big enough for the amount drawn out to exceed the amount put in.

How to make Universal work like Whole Life
You can set up a universal to work like whole life simply by adjusting your initial premium so that your savings continually grows. In fact, just a few dollars extra in the early years can result in a face value and cash value that are double or even triple the initial face value. It is also possible to pay enough in the first 20 years so that you can actually stop paying in later years and let the policy pay itself.

How NOT to use a Universal Life Policy
While you can start a universal policy by paying just the minimum, you need to remember that doing so will give you a policy that averages the cost of insurance for just five or six years. At the end of that time, you will definitely need to increase your premium, or you will have purchased a very short term. You always want to pay enough to keep the policy growing until you are 80 or 85 years old. If the savings grows that long, you will most likely have enough cash in it to pay for the policy to age 100. Also, don't ignore the annual statements. The policy grows partly on the basis of interest rates, which can fluctuate. If the interest rate drops, it is possible that you could have to increase your premium by a few dollars in order to continually grow the savings.

Talk to a real person
Universal life is easy to understand if you talk to a knowledgeable agent, work with a reputable company that sends yearly reviews, and examine the company-provided illustration. The following chart will also help you by showing you the advantages and disadvantages of a universal policy.

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