Universal Life Insurance Basics

Universal life lets you adjust the face amount or death benefit, amount and timing of premiums

You have to keep enough cash value to cover administrative expenses and mortality fees. The part of the premium not going toward the mortality charge is invested in a separate account of usually intermediate-term bonds.

The flexibility of universal life appeals to insurance shoppers who want to be able to adjust their payments in the event of uneven cash flow.

Maybe if you had mostly business assets or were real estate rich, but cash poor.

Many people will buy both a combination of term and flexible universal policy

The 4-6% return you earn on a universal policy doesn't compare favorably with what you may earn from other investments, but a low return is better than none at all.

Universal policies are very sensitive to interest rates. And cashing out, say, a whole life policy in order to buy a new universal (or variable) policy is not a good move. The only reason to replace a policy is if the policyholder becomes convinced the company cannot pay the death benefit.

Be skeptical about the policy illustrations. Use the services below to review their ratings.

A.M. Best is the oldest independent rating agency. Order a report directly over the Internet.

Moody’s is a rating agency that’s been around since 1909. They look at risk and credit worthiness. Phone: 212-553-0377

Duff & Phelps is another well-known independent rating agency that evaluates claims paying ability. Phone: 312-629-3833

Standard & Poor’s rates the financial stability of insurance companies in a number of categories. Phone: 212-208-1527

Although not essential, ratings are an indicator if the company is ready to push the bankrupt button.

Tell the truth on your application. If you have medical problems, depression, drink or smoke, etc., tell them. Consider a trial application if you have major health problems. A decline is like a bad credit rating. If you die within the first two years of the policy (the contestable period) and it's found that you made a misstatement on your application, the insurer can refuse to pay. If you lied about age or sex, they will only pay you the death benefit you would have gotten if you had told the truth.

Lastly, don't make your estate your the beneficiary because it will tie up the death benefit in probate.

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