According to national statistics, fewer than 45% of working families have individually owned life insurance policies. Most mistakenly think they are "covered on the job." Your employer's insurance will usually be radically reduced or even eliminated entirely when you retire. Also, if you leave the job before retiring, you leave that insurance behind. Buying your own when you retire will be shockingly expensive.

Universal Life: A safe option for the savvy buyer

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If you have priced life insurance recently, you know two things. 1. Term life is the least expensive way to get a high death benefit insurance, but the price will increase sharply and quickly when the initial term expires. 2. Whole life is safe and predictable, but if you need a high face value and have waited to middle age to think about it, the price can also be high.

An affordable alternative that can give you the coverage of whole life, a premium less than whole life—but more than term—and build a cash value as well is universal life.

Universal life is a continuously renewable term with flexible face value, adjustable premium and a cash accumulation account that funds the policy. You can add cash anytime you want to. You can also take cash out of it just like you could any other savings account, and you have the option of taking a loan rather than taking the cash out of the policy.

Many people are afraid to trust universal life—with good reason. In the 70s and 80s people took out policies that were based on a very high interest rate—sometimes as high as 14%. They had a premium hardly more than a term policy, but an interest rate that would grow the accumulation value much faster than it could be used for the cost of insurance and fees. When interest rates started to fall, however, the small premiums were not enough to keep pace with the rising cost of insurance. Many people received unexpected notices that they needed to increase their premium, sometimes by several hundred dollars. Furthermore, some people had taken cash out or had skipped payments, thinking they had plenty of money in the policy, only to have the policy lapse when they were unable to add sufficient funds. These scenarios can be avoided.

If the following points are kept in mind, universal life can be a viable option.

• Your premium plus interest builds cash accumulation. The accumulation funds the policy by paying the cost of insurance (COI) and fees. As long as your premium exceeds the sum of the COI and the fees, you will continue to build cash value.
  
  
• You can increase or decrease the premium at will, skip payments, and can decrease the benefit. However, in order to increase the death benefit you may have to prove insurability.
  
  
• If you over fund the policy in the early years, (by making sure you pay several dollars more than the target premium) you are less likely to need to increase the premium in later years.
  
  
• Look for a company that offers a free, personal, annual review and has knowledgeable agents who can explain interest rate changes and keep you up to date on your cash accumulation.
  
  
• If the cash accumulation starts to decrease, that means your premium is no longer enough to pay the COI plus fees. Before the cash drops too far, you should either increase the premium or cash out the policy and invest the accumulated funds into an annuity or single premium whole life. Be aware, though, that if you cash out the policy in the first 15 years, you will have a substantial surrender fee.
  
  
• With a typical universal life policy, your beneficiary will get the death benefit if you die, but if you are living at age 100, you will get a check for only the accumulated cash value. The accumulated cash can be either more or significantly less than the death benefit. Annual review is important.
  
  
• A company can manipulate universals in a variety of ways. You need a real person who understands and can explain the fine points. Take notes, keep them, and if you take out the policy, ask the agent to sign the notes.

If properly understood and correctly funded, a Universal Life can be a very satisfying solution to your life insurance needs.

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