Universal life insurance is a life insurance that involves putting the overall premiums into two uses. Part of the overall premium is used to make the death benefit viable which is known as the cost of insurance (COI). The remaining amount of the premium and other policy charges are pumped into the general account of the company and the interest rate applied on the cash value of the policy is applied on this amount. The first option is more affordable because the company pays less insurance while the second option is affordable as the insurer pays more.
Variable life insurance enables policy holders to invest their premiums into investment options that would yield greater returns. This insurance is part life insurance and part investment. This policy involves fixed premium that is put in a separate account that is exclusive for investing. The cash value or the death benefit of the policy is dependent on the success of the investment account. In variable life insurance, the policy holder can choose whether to invest in bonds, mutual funds or stocks. The policy holder can get tax-free appreciation which can be added to the premiums. However, there is no guaranteed cash value but the death benefit cannot go below the policy’s face value. The policy holder bears the risk of lower cash value from unsuccessful investment which the insurer beats the increased mortality risk. This is the most risky type of insurance because investments are always risky and ne is never sure of the returns (Cordell, & Langdon, 2009).
Variable-universal life insurance is more or less similar to universal life as some of the premium is directed to COI. However, in variable-universal life insurance, the excess premium can be invested in variable investment options at a fixed rate. The policy holder gets to choose the variable investment options which have basic funds with common investment objectives and can grow the cash value of the policy. Variable universal life insurance differs from the other two forms of insurance in that it enables the policy holder to choose how funds in the policy can be invested. Both variable and variable-universal insurance allow policy holders to choose investment options to invest in (Russel, Fier, Carson, & Dumm, 2013). The universal, variable and variable-universal life can therefore provide a death benefit protection to the family or to a business. Both universal and variable-universal insurance have flexible premium payments as one can chose both the premium amount and timing of the payments. Universal life insurance is the most flexible insurance of the three because it offers two death benefit options (Cordell, & Langdon, 2009).
Life insurance policies are affected by the ability of insurers to surrender the policy. This is because surrendering life policies might expose insurers to financial distress and disintermediation, as well as other macroeconomic variables. Life insurance pay-outs can therefore be risky to insurers especially during times of high interests or severe economic duress (Russel, Fier, Carson, & Dumm, 2013). According to Hoyt (1994), universal life policy has been the most popular life insurance policy mainly because of economic changes. Universal life insurance policy is a competitive insurance product in terms of the premium, benefit flexibility, and the crediting market rates of interest. It is also flexible and provides the death benefits. Inflation rates have also been contributing to the dissatisfaction with the other life insurance policies like variable life insurance (Hoyt, 1994).