Universal life insurance is form of flexible permanent life coverage exposing the low-cost safety of term life insurance in addition to a savings detail (like entire life insurance), which is invested to offer a cash value buildup. The death benefit, financial savings factor and premiums can be reviewed and changed as a policyholder’s circumstances change. Unlikewhole life insurance, universal life insurance allows the policyholder to use the interest from his accumulated savings to assist pay premiums over time.
This policy is also termed as adjustable life insurance, because it offers more flexibility. You have the options to reduce or increase your death benefit and to pay your premiums at any time and in any amount (subject to certain requirements) after your first premium payment has been made.
- Mortality cost – Unlike whole life policies, universal policies in Canada disclose the “mortality charges”. This is the portion of your premium that covers the “pure” cost of your death benefit.
- Savings or investment – Once the mortality costs (cost of insurance) and the administration charges (if any) have been deducted from your universal life insurance premium, the remainder of your premium is placed into an investment savings vehicle where it can grow and earn interest over the life of your policy. The “cash value” portion of your universal life insurance premium may also be referred to as the “cash surrender value” or “fund value”.
- Return on savings and investment – Any interest that your “cash value” earns over the life of your universal life policy is credited back to the cash value portion annually and invested…so basically, your money is compounding or earning money. Some companies will even provide a minimum return on investment. Newer universal life policies now disclose how your interest is calculated and invested. They even provide a list of investment options, so you have control over your investment.