In some ways, universal life insurance is similar to the whole life insurance plans. Basically, the idea behind this kind of life insurance policy is that life insurance providers will invest your premiums at a specific interest rate and the money earned will benefit both the insured and the life insurance company. The biggest problem with a life insurance policy of this kind is that interest rates seldom remain constant for long periods of time.

Those who know the term “universal life insurance” from several decades ago are likely wary of the concept. The reason is nothing more complicated than the historical account of a trend in the insurance industry during that time.

Interest rates skyrocketed in the 1970s and those who were looking for ways to make investments pay off turned to the idea of universal life policies. The idea was simple. The life insurance company would invest premiums with interest rates playing a major role in the accrued value of the life insurance policy. The problem was that companies tended to think in terms of those high interest rates of the moment. Predictions on the total value of universal life policies were made on the assumption that interest rates would remain high.

How Does Universal Life Insurance Work?
The policy works like this. You agree to specific premiums but if the money is earning significant interest your premiums are paid in part by that return. If interest rates are down, your premiums increase.

As interest rates dropped, the policy values failed to rise as dramatically as predicted. The result is that the universal life policy became branded as a bad deal. In fact, the opposite is true. But like any other investment, this type of life insurance coverage should be entered with an eye to the ultimate goal and with regard to the risk. Investments typically pay off in direct correlation to the amount of risk – lower risk of loss means lower returns. Because the universal life insurance is a stable investment with little or no risk, you can’t expect incredible returns for your dollars.

Ask your life insurance agent is this type of life insurance coverage is right for you.