Universal life insurance is a type of whole life insurance. Universal life differs from other whole life policies in that it allows the policy owner to vary, with limitations, the amount and timing of premium payments and the death benefit. These changes can be made while the policy is in effect.

Your choices must fall within the company's specified minimum and maximum amounts. These guidelines are set to meet life insurance regulations and maintain healthy relationships between premium, face amount, benefit, and cash value.

Universal Cash Value Options

It is not guaranteed, but it is possible the cash value in a universal life insurance policy could grow faster than is needed to pay the cost of insurance. You can generally choose how that money is used:

• Leave it there and accumulate interest. Taxes won't be due until you take it in cash, and future premiums may be reduced.

• Take it out in cash. The funds would be treated as taxable income and lower the policy's cash value.

Universal Death Benefit Choices

• Option A (or Option 1): Level death benefit is equal to the universal policy's face amount.

• Option B (or Option 2): Increasing death benefit is equal to the universal policy's face amount plus the policy's account value. Premiums will be higher for an Option B plan.

Vanishing Premiums

Before it was recently made illegal, some insurance agents used a sales pitch for universal life that suggested the premiums could vanish.

The pitch went like this:

1. You start out by putting a large, lump sum into the universal life policy.
2. The policy has the potential for making money -- much like an investment (but it is illegal for an agent to sell life insurance by calling it an investment).
3. The company may pay interest, if the company has a good year.
4. If the company does have a good year, the percentage of interest could be very high.
5. If you left the interest and dividends in your policy to build up with your cash value after a few years, you could have enough cash value in the policy to pay the premiums.

This scenario is possible, but not guaranteed, and perhaps not even probable.

The "vanishing premiums" scenario depends on three big "IFs:"

1. Only if the company has very good years.
2. Only if the company pays high dividends.
3. Only if you do not withdraw cash value.

Tip: InsureMe recommends that universal life insurance policies are most suitable for long-term obligations or sinking fund needs: estate growth, estate liquidity, death taxes, funding retirement needs, etc.

The answer on this page was edited based on source material from the Ohio Department of Insurance. These pages are no longer being updated. --Webmaster

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