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Is universal life insurance right for you?

Universal life insurance was developed in the late 1970s to overcome some of the disadvantages of term and whole life insurance.

As with other types of life insurance, you pay regular premiums to your insurance company. In exchange for these premiums, the insurance company will pay a specific benefit to your heirs upon your death.

And, like whole life insurance, a portion of each premium goes to the insurance company to pay for the pure cost of insurance. The remainder is invested in the company's general investment portfolio.

Most universal life policies pay at least a minimum guaranteed rate of return. Any returns above the guaranteed minimum will vary with the performance of the insurance company's portfolio.

You won't be able to exercise any control over where these funds are invested. The insurance company's professional portfolio managers will manage them. But there is an area where universal life policies offer a great deal of control.

Universal life policies are flexible. As the policy owner, you can vary the frequency and amount of the premium payments. You can also increase or decrease the amount of the insurance to suit changes in your situation.

If your financial situation improves significantly, you can increase your premiums and build up the cash value more rapidly. If you find yourself under a financial strain, you may even be able to deduct premium payments from the cash value of the policy.

With some universal life policies, you may even withdraw some of the cash value in your policy directly. Of course, you can also take a policy loan, just as you could with a whole life insurance policy. You have the flexibility to decide which will best meet your needs.

Changing the premium or withdrawing part of the cash value within your policy will affect the rate at which your cash value accumulates. It may also reduce the size of the death benefit.

And, unlike other tax-deferred investments, any cash you withdraw from your universal life policy is considered basis-first. You won't incur a tax liability until your withdrawals exceed the premiums you've paid into the policy. Any amounts that exceed the premiums will be taxed as regular income.

With many universal life policies, it is possible to structure your policy so that the invested cash value will eventually cover your premiums. You'll then have full life insurance coverage without having to pay any additional premiums as long as the cash value account balance is sufficient to pay for the pure cost of insurance and any other expenses and charges.

There can be surrender charges if the policy is surrendered prematurely.

For investors who want the flexibility to change their premium or death benefit, a universal life insurance policy may be ideal. The cost and availability of the type of life insurance that is appropriate for you depends on factors such as age, health and the type and amount of insurance you need. If you are considering purchasing life insurance, consult a professional to explore your options. It is also a good idea for any insurance product that you are investing money in to research the insurance company.

How do you compare one life insurance company with another? What features do you examine? What criteria do you use? How do you know what to look for?

These are difficult questions. Even so, making sure your insurance company is financially sound is an important part of ensuring family security.

Fortunately, there are a number of independent companies that will make these evaluations for you. These rating companies carefully examine each insurance company in the areas of profitability, debt, liquidity and other factors. From the results of these examinations, they then issue overall ratings.

Looking up a company's rating will provide you with a snapshot of that company's financial health. And tracking that rating on a regular basis should give you some advanced warning of trouble.

The four most prominent rating companies are A.M. Best, Standard and Poor's, Moody's and Fitch Ratings. Each of these services uses slightly different criteria when rating companies. As a result, each may have a slightly different view of a given company. A.M. Best ratings are based on financial conditions and performance; Moody's, Fitch Ratings, and Standard and Poor's ratings are based on claims-paying ability.

You should be able to find copies of at least one of these ratings in the reference section of your local library. If you are unable to find them, or if the ratings in your library are outdated, you can contact the services directly. All four services will provide ratings over the phone.

The A.M. Best Co.: (908) 439-2200, www.ambest.com

Standard & Poor's: (212) 438-2000, www.standardandpoors.com

Moody's Investor Services: (212) 553-0377, www.moodys.com

Fitch Ratings: (212) 908-0800, www.fitchratings.com

Wilsey is a registered principal with Linsco/Private Ledger, a member of the SIPC. "Smart Investing with Brent Wilsey" can be heard Saturdays at 8 a.m. on KFMB AM 760 and Tuesdays at 12:30 p.m. on Channel 8 news. Contact him at brent.wilsey@sddt.com. Comments may be published as Letters to the Editor.

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