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Essentially, Universal life is a combination of term insurance protection with the cash savings value of whole life. Interest rates paid on the cash value are typically higher with Universal life than Whole life because they tend to follow the markets.
This type of contract is designed with flexibility in mind. Premiums can be paid in a lump sum, annually, or anywhere in between. Minimum interest on the cash value is usually guaranteed, but will vary according to the investment performance. Each month deductions are made from the cash value fund to support the costs of the insurance protection. As long as the cash value is substantial enough to maintain the monthly costs, the policy will remain in force. Typically the death benefit reduces in proportion to the increase in cash value, thus causing a level death benefit.
Another form of Universal life is Variable Universal Life or Variable Life. Variable Universal life combines the growth potential of stocks with a guaranteed death benefit.
This type of policy allows premiums to be paid, reduced, or skipped at any time, and the contract will not lapse as long as sufficient cash value exists. The cash value fund can be split between different investment mediums such as stock, money market, and bond funds.
The key to any form of Universal Life is that it's interest-sensitive and allows for an adjustable death benefit.
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