A. We have discussed the advantages and disadvantages of whole life policies before, an universal life policy differs from whole life in that the universal life policies distinguish and itemize the protection, expense, and cash value elements, therefore the insurance company can build more flexibility into the policy.
Now let's discuss the advantages of universal life -
- The policy is transparent. In other words, the policy illustration and annual report break out and report each of the policy elements separately.
- Universal life insurance policies historically have paid a higher effective rate of interest on cash values than tax-free municipal bonds. Rates credited to those policies have more closely tracked rates paid on high-grade corporate and government bonds and mortgages.
- The policy owner has wide flexibility in selecting the premiums that are paid. Provided that there is enough cash value to cover mortality charges, the policy owner even may skip premium payments.
- Most universal life insurance policies offer two death benefit patters - option A and B.
- The policy owner may change the level of death benefits. Decreases in death benefit are permitted at virtually any time. Increases in face amount are generally permitted, subject to evidence of insurability.
- Policy cash values can be borrowed at a low net cost. Although policyowners must pay interest on policy loans, cash values continue to grow and are credited with at least the minimum guaranteed rate policy.
- Although the interest credited to cash values will vary with market rates, the cash values are not subject to the fluctuations in market value characteristic of longer-term municipal bonds and other longer-term fixed income investments when market rates change.
In our next blog post, we will discuss the disadvantages of universal life policies.