Universal life insurance

An unbundled whole life insurance product in which the mortality, investment, and expense factors used to calculate premium rates and cash values are expressed separately in the policy. In a universal life insurance policy, any applicable expense charges are deducted from the premium and the remainder of the premium is then credited to the policy's cash value. Each month the insurer deducts the mortality costs from the cash value and credits the remainder of the cash value with interest.

The owner of a universal life policy can specify the premium amount he or she will pay, as long as this amount falls within the minimum and maximum specified by the company. If the renewal premium is insufficient to pay the policy's mortality and expense charges, the balance is taken from the policy's cash value. If the premium exceeds the maximum level specified by the company, then the policy's cash value may grow too large in proportion to the policy's death benefit and the policy will be considered an investment contract rather than an insurance contract. The difference in size that must be maintained between the cash value and the death benefit is called the corridor.

In a universal life policy, the policyowner is permitted to change the policy's death benefit after the policy has been issued, although this right is subject to restrictions. First, if a policyowner wishes to increase the policy's death benefit the insurer may require evidence of insurability. Second, any decrease in the policy's death benefit must not violate the corridor guidelines.

A universal life insurance policy describes the mortality rate assumptions that the company is using to calculate the mortality charges. In addition, a maximum mortality charge per thousand dollars of coverage at each age is listed, and the insurer guarantees not to exceed this charge.

Most universal life insurance policies guarantee a minimum interest rate of 4 percent or 4 1/2 percent on the money in the policy's cash value. If economic conditions warrant, the interest rate may be higher, but it can be no lower. Normally, insurers state that the interest rate paid on the cash value will reflect current interest rates in the economy.

The cash value of a universal life insurance policy may be used as collateral for a policy loan in much the same way that the cash value of a traditional whole life policy may be used. The money in a universal life policy's cash value may also be withdrawn, rather than used as collateral for a policy loan. The cash value is reduced by the amount withdrawn plus any applicable cash withdrawal fees, but the policy remains in force. In contrast, the owner of a traditional whole life insurance policy can withdraw the cash value only by cancelling the policy.