Purchasing life insurance is often a critical part of estate planning. Although many other factors that impact your estate can change, life insurance is often purchased predominantly because the policy holder believes its value is fixed. By knowing ahead of time how much your life insurance policy is worth, and what it will cost you in premiums, you can adjust the remainder of your estate accordingly. While it is true that many forms of life insurance do provide fixed values, universal life insurance does not.
Universal life insurance is in the class of permanent life insurance along with whole life. This simply means that, unlike term insurance, the policy is guaranteed to remain in force until the maturity date of the policy, usually round age 95 to 100. Term insurance, on the other hand, only remains in effect for a specified period, such as a 10 year term. Unlike whole life, however, universal life insurance premiums are not fixed at the beginning of the contract. The policy holder of a universal life insurance policy may pay as little, or as much, as he or she wishes in premiums as long as the cost of the policy is covered. With a universal life policy, the insurer bills the policy for costs on a regular basis. The policy holder must maintain enough funds through payment of premiums to cover the costs. Additional funds paid as premiums then go toward the cash reserve and death benefit value of the policy.
With a universal life insurance policy, the death benefit and current cash value are constantly fluctuating, unlike a whole life or term life policy. With a whole life policy, the cash value growth rate is fixed at the beginning of the policy as is the death benefit value. With a term policy, there is no cash value, but the death benefit value is fixed. Because the premiums are not fixed in a universal policy, the cash value growth as well as the death benefit are subject to change