Insurance companies make life insurance products in different forms to suit different buyers and meet different preferences. The most common forms include:
There are actually two types of universal life policies;
- Guaranteed universal life insurance. There is no change in your premiums or death benefit. In most cases, there is little or no cash value in policies, and insurers require prompt payments. Death benefits can be guaranteed up until a certain age, like 95 or 100. Because of its minimal cash value, it’s usually cheaper than whole life and other forms of universal life insurance. A drawback is that if you miss a payment, you’ll forfeit the cash value of the policy.
- Indexed universal life insurance. The cash value component of indexed universal life insurance is linked to a stock market index, such as the S&P 500. Gains are calculated according to a formula in your policy. This type is appealing as there’s potential for considerable gains. Additionally, your payments and death benefit amount are flexible within limits. On the flip side, these policies require more monitoring, and investment caps can limit gains.
Bonds and mutual funds are investments tied to variable life and universal life insurance cash values. In most cases, variable life insurance premiums and death benefits are guaranteed no matter what happens to the market. Additionally, if your investment choices succeed, you can earn substantial gains. There’s also the option to borrow against the cash value or take partial withdrawals from it.
Unlike variable universal life insurance premiums, whose benefits are not guaranteed, variable universal life insurance rates are adjustable. If you’re interested in such a policy, a fee-only financial advisor can guide you in selecting the best one since they aren’t paid based on the sale of products.
Variable life insurance has, however, been criticized for requiring active management as the cash value can fluctuate daily based on the market. And, your payment is deducted from the cash value before fees and administrative charges are applied.