Concept of Universal and Variable Life Insurance
This presentation represents a simple description of the basic concept and mechanics of universal and variable life insurance policies. It is not intended to represent the features of any specific product.
Universal and variable life insurance are types of permanent life insurance and both have the potential to accumulate cash value. How the cash value is invested by the insurance company is one of the key differences between the two.
- 1A The actual cost of insurance increases with age and can become very expensive in later years. This is generally how term insurance works.
- 1B Most permanent life insurance policies charge a level premium. This is accomplished by basically “overcharging” in the early years and “undercharging” in the later years. Part of your premium is invested by the insurance company and accumulates as cash value in the policy. Some investment earnings are used to help offset the higher cost of insurance in later years.
- 1C For universal life insurance policies, cash value is supported by the insurance company’s general account.For variable life insurance policies, cash value is supported by the insurance company’s separate account, and your return will be based on the investment options you select. One way to describe how both policies work is to think of them as a bucket, called the contract fund, into which net premiums are paid and from which most charges and fees are taken.
- 1D1 When premiums are paid, deductions are taken for such things as charges for premium taxes and, in some cases, sales fees. The balance of the premium, or net premium, is allocated to either the insurance company’s general account (universal) or separate account (variable) and accumulates in the policy’s contract fund.
- 1E Each month deductions are made from the contract fund to pay the cost of insurance, which increases over time, and other charges for administration and any additional benefits.
- 1F There is a contingent surrender charge usually during the first 10-20 years. This would generally apply if the policy is surrendered, lapsed, or if the face amount is reduced.Continued timely premium payments, favorable investment results for variable life and current crediting rates for universal life, and time can potentially result in the cash value of the policy growing after a number of years.
- 1G For variable life policies, cash value is not guaranteed and will vary with the performance of the chosen investment options. With universal life policies, a minimum interest rate is guaranteed.
- 1H Cash value may grow sufficiently so that it may exceed the monthly cost of insurance charges and other fees. You may also be able to pay less out-of-pocket premiums. If cash value is insufficient, you may need to make additional payments, which could be higher than the original premium.
- 1I1 If cash value is more than sufficient, you may be able to access it through loans and withdrawals. For non-modified endowment contracts, loans and withdrawals* are generally not taxable when they are taken. Policy loans and withdrawals will reduce the cash value and the death benefit payable to your beneficiaries and may have tax consequences.*
Both universal life and variable life insurance policies can offer you:
- Flexibility in the amount and timing of premium payments.
- Death benefit guarantees and options, depending on the type of policy.
- Potential for income tax-deferred cash accumulation.
In addition, universal life offers you the security of a minimum guaranteed crediting rate, and variable life offers you a choice of investment options.
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