The general perception about life insurance is that it is a
risk-free model for the policy holders. This conception arises out of the fact
that through insurance of your life, you transfer the financial risk to the
insurer in the event of your demise before the completion of term. However in
some cases, the risk may give a blow to you instead of the insurer. That
probability makes it important that you learn the risks that are common to all life
insurance policies.
Experience
of Mortality
In
universal life insurance, there is a clear distinction between mortality
function and investment function of a certain plan. It implies that you are not
charged for the guaranteed cost of the particular policy; instead a
forward-looking approach to cost is adopted by the insurance company. This
working method is based on a presumption that the guaranteed cost will be more
than the real cost. If the company is a genuine one and reputed for its fair
dealing, you have to pay only for the calculated cost. But if the company is
used to shoddy business practice, you will end up paying higher cost for
insurance. You may think about terminating the life insurance plan if you find it
hard to afford high premium for a longer time span.
Experience
of Investment
In case of fixed policies, universal life
insurance comes with assumed interest rate. This rate refers to the lowest
interest charge that must accrue to the cash-value account of the policy
holders. The assumed interest rate covers expected profit and cost incurred by
the insurer. This rate is of dynamic nature and varies in respect to market
condition. The life
insurance company expects a positive investment experience. If that
happens in reality, the assumed interest rate will be credited to your policy.
But in the event of incorrect assumption, you will get less than assumed
interest rate. Complication arises if the insurer feels that actual mortality
charge will be lower than the estimated margin. You will not gain much if
interest accumulating on your policy is not sufficient to cover the insurance
cost. As a result, you may end up paying for additional premium to keep hold of
the policy or may seek to lower death benefits that come with the insurance
plan.
Payment
for Premium
Every policy owner is obliged to
meet on-time premium payment for a long period of time to retain life insurance
policy. Excluding the case of one-year and five-year policies, the premium
period extends over 10 years. In case of permanent plan, premium is to be paid
for more than 50 years. If premium is not paid in time, the policy may lapse
and there will be great loss of coverage on your part.
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