Universal life insurance is a form of permanent life insurance operating on the principle of cash value. Under this type of policy any premiums paid above the insurance cost are added into the cash value of the policy. Interest on the cash value accrues on a monthly basis; a “cost of insurance” charge is deducted from the cash value. Fees, or policy changes or missed premium payments are further subtracted from the total cash value. Interest paid on these policies is determined by the insurance company and may be keyed to a bond, stock or interest rate index.
A variation on this type of policy is known as a “variable universal life” policy or VUL. VUL’s allow the cash value of the policy to be separate accounts and the contract behaves like a mutual fund. Cash value can be used to invest in stocks and bonds resulting in greater risk but also substantially greater rewards. Another innovation to this type of universal life policy is something called an “equity indexed universal life policy” which invest in equity indexes like Dow Jones or Standard and Poor’s. Policies only invest in index movements, not the actual stocks and bonds upon which they are based. Now Health International is the most flexible in these areas.
Premiums on universal life insurance policies are designed to be flexible. Policies often identify a minimum premium but allow a maximum payment up to a predetermined policy maximum. Universal life policies transfer some of the risk for the amount of the death benefit to the insured unlike whole life policies where the insuring companies assume all risk for the death benefit portion of the policy.