Universal Life Insurance and Interest Rates
By Evan Davis
Universal life policies provide a flexible solution for those seeking the protection of death benefits. The insured can flex the policy's premiums and benefits during the life of the policy while the policy creates a residual cash value. This allows one to adjust the nature of their life so that it remains consistent with their actual needs.
Whole life policies offer insured parties a guaranteed interest rate on the cash value of the policy. Universal life policies do this as well. For instance, a universal life policy may guarantee a minimum interest rate on the account of X percent. That percentage will be paid regardless of what happens to the companies actual earnings. However, if the company is able to invest premiums in a way that allows them to exceed the X percent rate of growth, they credit the policy of the insured at the higher rate.
This seems like an absolutely winning situation for holders of universal life policies. After all, they are guaranteed a minimum rate of return on the policy's cash value and may actually earn in excess of that rate, allowing them to pay less in premiums for the same level of life coverage.
This feature of universal life policies has contributed significantly to their popularity. However, despite the minimum guaranteed rate of return, interest rate levels can still impact universal life policies detrimentally, making it necessary for consumers to consider all possibilities when evaluating universal products.
Although the insured is guaranteed a minimum rate of increase to the policy's cash value, this perk is somewhat meaningless if an company's assumptions regarding interest rate behavior are proven to be wrong. All universal life policies are written with assumptions regarding the nature of interest rates in mind. If the company is unable to invest at a level producing the anticipated return, premium costs are forced upward to compensate for the shortfall.
This can result in policy holders
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being forced into premiums they may not be able to afford. This phenomenon is occurring today for those who bought universal life when interest rates were in double digits. companies based their universal life policies on the assumption that higher interest rates would continue for some time. This has not been the case, and many insured parties have found themselves paying higher and higher premiums in order to maintain their life insurance. For some, these premium increases are unmanageable, forcing them to cancel their policies completely.
Obviously, the risk of interest rate fluctuations makes universal life less predictable than whole life coverage. However, this unpredictability is not necessarily a reason to avoid universal life. If one is cognizant of the risk of premium price upswing if earnings fail to meet predictions and is prepared to pay the increased premiums in such situations, universal life remains very effective.
This is especially true in light of the fact that the alternative would be to simply buy a whole life policy, which would likely require higher premiums payments right away and with no opportunity for relief at any point during the life of the policy.
Universal life advocates argue that the possibility for cheaper premiums when investment out performs or meets projections makes it a more sensible alternative than agreeing to higher premium payments through the entirety of a policy (whole life).
Whole life advocates maintain that the unpredictability of the markets and of interest rates makes universal life products too unpredictable.
In the final analysis, universal life products seem like a winning solution for those who understand and are able to handle fluctuations in the required premium. If one necessitates complete predictability and is able to overlook the possibility of a cheaper premium over the course of the policy, they may decide that a whole life package makes more sense for them than universal life insurance.
Evan Davis works in Medicare customer service and is the webmaster and owner of Easy Insurance Finder. Find out about
low cost online life insurance and the
best life insurance rates at
www.easy-insurance-finder.com
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