Universal Life (UL) (often called VUL, or Variable universal life insurance) is a type of life insurance based on an account value. That is, an account is established with the insurer, which is credited each month with interest, and debited each month by a cost of insurance (COI) charge. The interest credited the account is determined by the insurer; often it is pegged to a financial index.
Uses
Universal Life is used a tax-advantaged way to purchase life insurance. In the early years of the contract, the premium far exceeds the cost of insurance (COI) charges. The difference between the two (the "inside build-up") will grow tax-deferred so long as the policy remains in force. If the policy is held until death, this inside build-up will escape taxation entirely. Policyholders may also be able to access the inside build-up via a policy loan without incurring it as taxable income.
Types
Single Premium
Single Premium UL is paid for by a single, substantial, initial payment. The policy remains in force so long as the COI charges have not depleted the account.
Fixed Premium
Fixed Premium UL is paid for by periodic premium payments. Generally these payments will be for a shorter period of time than the policy is in force; for example payments may be made for 10 years, with the intention that thereafter the policy is paid-up. If the experience of the plan is not as good as predicted, the account value at the end of the premium period may not be adequate to continue the policy as originally written. In this case, the policyholder may have the choice to either: 1. Leave the policy alone, and let it potentially expire early (if COI charges deplete the account), or 2. Make additional or higher premium payments, to keep the death benefit level, or 3. Lower the death benefit.
Flexible Premium
Flexible Premium UL allows the policyholder to determine how much they wish to pay each time premium is due. In addition, Flexible Premium UL offers two different death benefit options: 1. A level death benefit (often called Option A), or 2. A level amount at risk (often called Option B). This is also referred to as an increasing death benefit.
Policyholders frequently buy Flexible Premium UL with a large initial deposit, thereafter making payments irregularly.
