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Universal Life Insurance

Universal life insurance is a form of life insurance plan that continues for the whole time that you are alive. This plan is also called cash value life insurance due to the savings account built up into the plan. A share of the premium amount you pay each month transfers into the savings component. When the cash value built by you reaches a certain limit after a specific time, you can encash it.

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What is Universal Life Insurance?

A universal life insurance policy is different from a basic life insurance plan because it is more flexible in respect of the death benefit payout, which you can decrease or increase depending on your medical condition and your preferences. In order to increase the sum assured amount that is your life cover, you have to go through a complete medical test that assures the bank that you are in good health condition. Reducing the coverage simply means paying lesser premiums, which can be done without surrendering up the whole policy if you pay a small amount as surrender charges. Read on to more about universal life policy in detail: 

How Does a Universal Insurance Policy Work?

The premium amount paid by you for maintaining the Universal life insurance plan is divided into 2 parts. Principally one part goes to your life insurance plan and the other part transfers into your investment and savings. 

This plan offers you flexibility as you can select how much amount of premium you are required to pay. The minimum premium amount is fixed at the insurance price. Any extra amount goes to the savings account and these deposits increase at the rate that is decided by the insurer. Sometimes, this evolution can be impacted by market fluctuations and conditions. 

Insurance advisors suggest to pay the maximum amount of premiums as possible in the starting years so that you can accrue a substantial cash value. You can further use this to pay your premiums in the future at later stages in life. 

What are the Features of Universal Insurance Policy?

Universal life insurance is a type of permanent life insurance that provides different features in common with a whole life plan: 

  • Permanent life coverage 

  • Payment of a death benefit 

  • Receives a cash value 

  • Flexible payments, benefits, and terms 

  • Changing coverage for changing requirements 

  • More economical than whole life insurance plans 

What are the Types of Universal Life Insurance? 

Following are the types of Universal Insurance Policy: 

  • Indexed Universal Life Insurance (IUL):: In this, the cash value is solely dependent on the performance of the market. The cash value increases when the market is doing good. Also, if the market performance is not that good, the value decreases. Thus, it affects your premium rates.

  • Guaranteed Universal Life Insurance (GUL):: In Guaranteed Universal insurance policy, the rate of interest is fixed and the rates of premium stay the same for the full period of the policies. It is majorly less risky in comparison to other types and is effective until the premium amounts are being paid on time. GUL Insurance plan is inclined more towards providing life coverage and it's less on building the cash value.

  • Variable Universal Life Insurance (VUL):: Variable life insurance is one of the types of permanent life insurance. In a variable universal life plan, apart from offering life coverage, this plan invests part of a cash value into a mutual fund. In this, the interest earned by you is based on the market condition and then you are charged a fee for this. 

What are the Benefits of Universal Life Insurance Policy?

Here is a list of benefits of buying a Universal Insurance Policy in India: 

  • Guaranteed Death Benefits: In case of the death of the policyholder during the policy term, the nominee is guaranteed a certain amount of money, irrespective of the policy’s collected cash value. This amount can help the nominees take care of their financial needs like paying the rent, paying for the child’s fees, and paying off the remaining loans. 

  • Flexible Premium Payments: With a universal insurance policy, you can choose suitable premium payment terms and modes as per your needs. For example, you can choose to pay the premiums in an annual, semi-annual, quarterly, or monthly mode for the regular or limited policy term or pay the premiums in a single go.

  • Wealth Creation Benefits: Universal insurance policy provides the policyholders a chance to create wealth for their future. This corpus buildup can help the nominees beat inflation and take care of any other financial requirements like the child’s higher education or wedding.

  • Loan Facility: Universal insurance policy allows customers to take out loans in case of a financial emergency, like unexpected medical bills and more. 

  • Tax Benefits: You can claim life insurance tax benefits on the premiums paid under Sections 80C and 80D of the Income Tax Act, 1961. Not only that, your family can receive a tax-free death benefit under Section 10(10D) as per the prevailing tax laws. 

There are extra fees related to these types of plans. The saving aspect of universal life insurance has some risks. Study thoroughly before buying these policies and do not buy any plan without carefully going through T&Cs. 

Disadvantages of Universal Life Insurance Policies 

The only main disadvantage of universal life insurance is that if the plan starts performing poorly, growth cannot be expected and you might end up spending a large amount of money as premium amounts to keep the cash value to the highest possible and support results with the risk of high surrender rates. However, if flexibility is one of your preferences, you must choose universal life insurance.

Factors to Consider Before Buying Universal Insurance Policy in India

Here is a list of factors you should consider before buying a universal insurance policy in India:

  • Age and Health: The premiums increase with the increasing age and decreasing health conditions of the individual. Therefore, you should consider buying universal insurance early to secure large life cover at affordable premiums.

  • Sum Assured: The sum assured will be payable to your family in case of your death. Thus, the life cover amount should be enough to cover your family’s needs in your absence and help them live a financially stable life.

  • Premiums: The premiums of your universal insurance policy should be within your budget to avoid any future lapses. A large premium amount can strain your financial conditions and lead to policy lapses.

  • Wealth Creation: You should always make sure that the applicable interest for the universal insurance policy’s wealth creation component is enough to meet your financial needs.

  • Risk Appetite: Go through the list of available funds and select the suitable fund option as per your risk appetite.

  • Applicable Charges: Always ensure that you read the policy documents to check the applicable charges like surrender, mortality, or fund management charges.

  • Customisations: You should always customise your universal insurance policy details to fit your needs, like selecting the right riders and options for the suitable premium payment and benefit payout options.

FAQ's

  • What is the difference between Universal life insurance and whole life insurance? 

    A. The main difference between universal life insurance and whole life insurance is that UIL insurance offers more flexibility. Life assured can sometimes differ his/her death benefits and premium payments with universal life. Whole life insurance offers set premium payment options. Both types of plans have cash value and you can attach add-ons to either one. 
  • Does Universal Life Insurance expire? 

    A. UIL generally guarantees a price up to a certain age like 100. If you cross this age, you can still keep the policy active but will have to pay a large increase in the rate. A universal life policy will terminate if you stop paying the premium prices and the cash value depleted. 
  • What happens to the cash value in a Universal life insurance plan at death? 

    A. Cash value is used during your lifetime. Once you pass away, any cash value typically reverts to the insurer. Your nominees/beneficiaries receive the death benefit, which is the policy’s face value minus any unpaid plan withdrawals and loans.
  • Can the premiums of Universal life insurance increase over time?

    Ans: Yes, the premiums of a universal insurance policy may increase over time if the accrued cash value is not enough to cover the administrative fees and death benefit costs. You should regularly monitor your premiums and ensure they fit within your budget.
  • Who is universal life insurance best suited for?

    Ans: A universal insurance policy is best suited for individuals who want dual benefits of insurance and investment in their life insurance plans.
  • Can I make details of my universal insurance policy?

    Ans: Yes, you can make changes in the details of your universal life insurance policy, like premium payment terms, death benefits, payout options, or fund allocations, as per the T&Cs of the insurance.
  • Can I buy a universal insurance policy for someone else?

    Ans: Yes, you can buy universal life insurance for someone else, like spouse or child and secure their financial future. The life assured needs to provide consent and undergo the regular underwriting process to ensure their eligibility.
  • What are the advantages of buying a universal insurance policy?

    Ans. Here is a list of advantages of buying a universal insurance policy in India:

    • You receive the dual benefit of savings and insurance. 
    • You are not required to pay premiums for various investment and insurance plans all at one time.
    • Universal insurance plans come with a flexible option of payment. You can decide how much premium amount you wish to pay above the sum that is fixed for life coverage. 
    • Most plans provide an adjustable death benefit, which means that the amount can be increased or decreased depending on the requirements of the policyholder. 
    • These plans provide you with a guaranteed interest rate, and thus, the policy’s cash value is guaranteed to keep growing. 
    • Universal insurance plans provide adjustable coverage for altering requirements. The payouts and premium amounts can be adjusted with time to consider inflation.

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