Final answer:
A Universal Life insurance policy features two interest rates: a guaranteed rate, offering a minimum growth of cash value, and a current rate, reflecting variable returns based on market performance. This allows for both stability and the potential for increased earnings, which can be fundamental aspects of personal financial planning.
Step-by-step explanation:
A Universal Life insurance policy includes benefits like a death benefit and a cash value that accumulates over time, providing an account for the policyholder's use. This type of policy has two types of interest rates guaranteed and current. The guaranteed interest rate is the minimum rate the cash value will earn, as set out in the policy contract, ensuring that the policyholder has a baseline expectation of growth. The current interest rate is often higher than the guaranteed rate and reflects the insurer's investment earnings, which can vary over time.
Unlike a fixed-rate mortgage that maintains the same interest rate over the life of a loan, a Universal Life insurance policy's current interest can change. As market conditions fluctuate, so too might the interest rates applied to the policy's cash value, although the guaranteed rate ensures it never falls below a certain percentage. This flexibility is similar to that of an adjustable-rate mortgage, which also changes with market rates.
Having life insurance can be a part of a sound financial plan, allowing individuals to protect their family's financial future while also potentially building cash value that can be accessed under certain conditions. As a financial instrument, life insurance plays a significant role in personal finance management, similar to decisions people make about mortgages, health insurance, and savings.