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Interest Rates And Universal Life Insurance
By: Evan Davis
Universal life insurance policies provide a flexible insurance solution for
those seeking the protection of death benefits. The insured can flex the
policy's premiums and benefits during the life of the policy while the policy
creates a residual cash value. This allows one to adjust the nature of their
life insurance so that it remains consistent with their actual needs.
Whole life insurance policies offer insured parties a guaranteed interest rate
on the cash value of the policy. Universal life policies do this as well. For
instance, a universal life policy may guarantee a minimum interest rate on the
account of X percent. That percentage will be paid regardless of what happens to
the insurance companies actual earnings. However, if the insurance company is
able to invest premiums in a way that allows them to exceed the X percent rate
of growth, they credit the policy of the insured at the higher rate.
This seems like an absolutely winning situation for holders of universal life
policies. After all, they are guaranteed a minimum rate of return on the
policy's cash value and may actually earn in excess of that rate, allowing them
to pay less in premiums for the same level of life insurance coverage.
This feature of universal life insurance policies has contributed significantly
to their popularity. However, despite the minimum guaranteed rate of return,
interest rate levels can still impact universal life insurance policies
detrimentally, making it necessary for consumers to consider all possibilities
when evaluating universal products.
Although the insured is guaranteed a minimum rate of increase to the policy's
cash value, this perk is somewhat meaningless if an insurance company's
assumptions regarding interest rate behavior are proven to be wrong. All
universal life policies are written with assumptions regarding the nature of
interest rates in mind. If the company is unable to invest at a level producing
the anticipated return, premium costs are forced upward to compensate for the
shortfall.
This can result in policyholders being forced into premiums they may not be able
to afford. This phenomenon is occurring today for those who bought universal
life insurance when interest rates were in double digits. Insurance companies
based their universal life insurance policies on the assumption that higher
interest rates would continue for some time. This has not been the case, and
many insured parties have found themselves paying higher and higher premiums in
order to maintain their life insurance. For some, these premium increases are
unmanageable, forcing them to cancel their policies completely.
Obviously, the risk of interest rate fluctuations makes universal life insurance
less predictable than whole life insurance coverage. However, this
unpredictability is not necessarily a reason to avoid universal life. If one is
cognizant of the risk of premium price upswing if earnings fail to meet
predictions and is prepared to pay the increased premiums in such situations,
universal life remains very effective.
This is especially true in light of the fact that the alternative would be to
simply buy a whole life insurance policy, which would likely require higher
premiums payments right away and with no opportunity for relief at any point
during the life of the policy.
Universal life advocates argue that the possibility for cheaper premiums when
investment out performs or meets projections makes it a more sensible
alternative than agreeing to higher premium payments through the entirety of a
policy (whole life).
Whole life advocates maintain that the unpredictability of the markets and of
interest rates makes universal life insurance products too unpredictable.
In the final analysis, universal life insurance products seem like a winning
solution for those who understand and are able to handle fluctuations in the
required premium. If one necessitates complete predictability and is able to
overlook the possibility of a cheaper premium over the course of the policy,
they may decide that a whole life package makes more sense for them than
universal life insurance.
About the Author:
Evan Davis works in Medicare customer service and is the webmaster and owner of
Easy Insurance Finder. Find out about variable life insurance and online
universal life quotes at www.easy-insurance-finder.com
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