Universal Life Insurance

Read on to learn how Universal Life Insurance works in 2021, the plan’s advantages and disadvantages. Therefore, you can decide whether Universal life insurance is the correct type of life insurance for you!

What is Universal Life Insurance?

Universal Life is based on term life and has an additional cash value. In other words, Universal life insurance is the combination of the pure insurance elements of term life with the savings account features of whole life insurance. Here, instead of choosing a specific term and paying a 100% premium for that policy, a portion of the premium goes to the policy’s cash account. This cash account accrues interest and is tax-deferred. It is flexible and has the advantage of increasing or decreasing future insurance or stopping premiums if there is significant cash accumulation. If you can’t afford high coverage, you can start with lower coverage and buy more coverage by increasing your premium. Besides, you have an option to pay up the policy in 10, 15, 20 years, and in any case, you are covered up to age 100.

Features of universal life insurance policy

Protection and Accumulation is distinguished

Unlike Whole Life, the illustrations and annual reports sent to Universal life insurance customers clearly show the specific components of the contract: Fee, Protection Benefit, Account Value, Interest Rate, Cost of Risk and other costs.

Premiums

Excluding the first few years (2 – 5 years), the customer is free to decide on the premium rate and premium payment period. However, customers need to understand and carefully consider the risks of this flexible fee payment.

Cost of Insurance (COI)

COI is the price of the Insurance Benefits and is deducted monthly from Account Value. COI is calculated as follows:

COI = Mortality rate X Net Amount at Risk

In which: 

• The mortality rate is taken from the Table of mortality of each insurance company
• Net Amount at Risk = Insurance Amount (or Death Benefit) – Account value
• Other costs

Initial cost: business commission, appraisal, issue contract, etc.

Cost of contract management

Withdrawal fee: may be free or may be charged a fee for withdrawals for a limited number of years.

Cancellation fee: can be free or charged a cancellation fee for a certain number of years.

All mentioned costs (or fee calculation) are indicated in the Table of Figures and Terms of Contract for each year.

Interest rate

Including Guarantee Rate and Unsecured Rate

Interest rate is Calculated on the account value used by the insurer to invest.

The guaranteed interest rate is the minimum interest rate the insurer commits to pay, and The Unsecured Rate is the interest rate used for illustration purposes only.

The actual interest rate the customer may receive may be greater or less than the Unsecured Interest rate, and its minimum is equal to the Guaranteed Interest rate.

Flexibility

• Pay the fee

The customer is flexible in deciding the premium rate and the payment period (after the first few years, which are mandatory). Customers may not even need to pay fees if the account value is enough to offset the costs in the contract.

However, please always consider the risks of the flexibility in fee payment.

• Increase/Decrease in Sum Assured

Increase in Sum Assured: Health and financial status is required

Decrease in Sum Assured: no need to prove health or financial status.

• Switch between basic and advanced benefits

Clients may need to prove health status, and this kind of switch is only allowed for a certain period.

• Additional investment

Clients have the right to invest more (pay additional fees, in addition to the basic premium) at any time when the contract is in force. The additional investment amount may be limited (5-10 times as the basic premium).

• Full or partial withdrawal

The Client is not subject to the withdrawal amount’s interest but may reduce the Sum Insured / Death Benefit precisely to the amount withdrawn.

Pros and Cons of Universal Life Insurance

Advantages of Universal Life insurance

Universal Life gives the insured the flexibility to buy insurance, as mentioned above. Because this policy is involved with cash, you can suspend premiums as long as your cash value is enough to cover the premium. You can also increase or decrease death benefits over time. Alternatively, you can usually borrow from that insurance policy.

Its flexibility is possibly one of the most attractive features of universal life insurance. You can choose when and how much premium you pay at a specific time, as long as payments meet the minimum amount required to keep the policy active and after you have already made your first regular payment.

Therefore, you can pay more premiums than required if your financial situation is good and vice versa, pay less premiums or even skip payments if your budget is tight.

Cash value grows at a variable rate of interest, which could yield higher returns.

Plus the flexibility, you have more opportunities to increase the universal life insurance policy’s cash value.

Disadvantages of Universal Life insurance

Universal Life Insurance is much more expensive than Term Life Insurance. A positive cash value is required to remain active, in accordance with the Universal Life Insurance policy.

Unlike whole life insurance, the insured does not have the available guaranteed level premium.

The interest rate is variable, which means that the interest on the cash value could be lower than expected at times.

To sum up

Now that you have learned how Universal Life Insurance policy works, its essential features and all about the pros and cons of Universal Life Insurance, you can better decide how Universal Life Insurance could fit your needs in the long term. 

Contact Insurance Direct Canada (IDC) to get a thorough assessment of your need for life insurance. We do not let you make this difficult decision on your own.

Frequently Asked Questions