Universal Life Insurance

Universal Life insurance is an older type of policy that is also known as the old generation products.  This has been replaced by new generation products which are being used in South Africa for the last couple of years. 

The Universal Life policy works in a completely different manner than today’s new generation products.  With today’s products you take out pure cover policies. 

This means there are no savings or investment element added to your policy.  It is purely a risk policy where you can add or take away benefits as you please and as you need them. 

With a Universal Life policy you combined your life cover and any other supplementary cover you needed with a savings element which we will call the investment account from now on. 

When you started this type of plan you decided on the amount and type of cover you needed and the insurer calculated a monthly premium based on this information. 

Your monthly premiums were then split and the insurer used the one portion of your premium to pay for your life cover and the remaining balance was left in the investment account. 

With your first premium most of that money was used to pay for your life cover, and other benefits, with only a small portion of your premium going into the investment account. 

But over time bigger portions of your premiums should go towards the investment account and less will be used to pay for the life cover.  Here is an example:

You needed R500 000 life cover but small amounts of your premiums are invested in the investment account.  The investment account also grows with interest and returns on that investment amount.  Let’s say after 10 years you have R100 000 in your investment account. 

Because R100 000 is available you will only need to buy R400 000 of life cover to reach your life cover need of R500 000. 

It is cheaper to pay for R400 000 rather than R500 000 worth of life cover and therefore a bigger part of your premium should go towards the investment account.

There are pros and cons to this type of plan and it is best to speak to a financial planner if you consider changing or replacing your existing Universal Life policy.

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