Cash Value in Universal Life Insurance

Cash value is actually the core of your universal life insurance policy.  You don't pay premiums to the insurance company; you pay premiums into your policy's cash value account.  That's right, your entire premium goes into your cash value.

Paying for universal life insurance

To cover the cost of your policy, the insurer periodically extracts fees from the money in your cash value account and then sends you an invoice which itemizes its charges.  This means that you, as policy owner, need to keep an eye on the level of your cash value and anticipate the insurer's charges.  If your cash value becomes depleted, your life insurance policy will lapse.

Your agent will probably periodically monitor the status of your policy, but ultimately the survival of your life insurance policy is your prerogative.  (*You can spare yourself this weight of responsibility by attaching a No Lapse Guaranteed Benefit Rider to your policy.)

Premiums

You pay whenever you want, in whatever amount you want.†  Your insurance agent will help you work out a premium payment schedule that will help you reach the financial goals that you set for your universal life insurance policy.  However, you are not obliged to abide by any schedule at all.

(†The insurer may have no restrictions, but in order to maintain your policy's tax advantages, you must abide by certain federal limits, which impose a maximum amount that you can invest in your policy over a given period.)

Interest rate

In universal life insurance, the rate of interest which your cash value enjoys is set by the company.  This rate is called the current rate or current assumption and is subject to change at any time.  However, the insurer guarantees a minimum rate of interest, below which the interest on your policy will never fall.

Cost of insurance (COI)

The primary expense which the insurer levies against your policy is your cost of insurance.  In universal life insurance, your cost of insurance is based, in part, on the difference between your policy's face value (death benefit) and its cash value.  Therefore, fluctuations in your cash value will affect your cost of insurance.  You pay a lower price when you keep your cash value shored up.

Accessing cash value

Universal life insurance offers four methods to make use of your cash value.  (See "Cash value" for greater detail on each.)

• Surrender — Terminate your policy and take the cash value.
• Policy loan — The insurer provides you a loan.
• Collateral assignment — Use your policy as collateral for a loan from another institution.
• Withdrawal — Take a portion of your cash value, never to repay.

If you have questions or would like to purchase universal life insurance, call 1-800-823-4852 for free assistance from a licensed life insurance advisor.