Why is universal life insurance so popular?
Universal life insurance is the combination of an interest based “investment” and term life insurance. Universal life has the selling features of flexible premiums and being able to increase and decrease the amount of death benefit, depending upon the balance in the policy cash account. Provided there is sufficient cash in the account, the policyowner can elect to reduce or forgo a premium to meet other cash flow needs. Conversely, the policyowner can pay in more than required, and thus build up the interest bearing cash account. Universal life was the life insurance industry’s answer to mutual funds and to the extremely high interest rates experienced in the 1970s and 1980s. Traditional whole life insurance contracts earn 3.5% to 5% interest. To be competitive with other products offered to investors, universal life products were developed with relatively high “prospective” interest rates (8%, 10% and 12%). The usual “floor” or guaranteed rate is in the range of 3.5% to 4%. Universal
