Universal Life Insurance: What it is and how it works
Universal life insurance offers permanent coverage to many people who are looking for a plan that lasts their entire lives and that the payment remains fixed as well.
Most people looking for life insurance will have to decide between term (temporary) life insurance and permanent life insurance. While term insurance is straight forward, permanent life insurance has several alternatives, each offering a different way to accumulate money.
One of the popular varieties of permanent insurance is universal life insurance. While the cash value offered by the policy provides flexibility, it can be confusing and more expensive than consumers need.
What is universal life insurance?
What sets universal life insurance apart from other types of permanent life insurance is that it allows you to use cash value to pay your premiums. But like other permanent policies, it lasts your entire life and pays a tax-free death benefit to your beneficiaries when you die. The Death Benefit Under Universal Life Option B
Part of the premiums you pay go towards the death benefit, while the rest is contributed to the cash value of your policy, which earns a small amount of variable interest and isn’t taxed as it grows. While you are alive, you can use the cash value to:
- Pay your policy premiums
- Withdraw cash, but with additional charges
- Take out a loan, which you will have to repay with interest
While the cash value grows tax-deferred, withdrawals are taxed as income.
Universal Life Insurance Definition
Universal life insurance is a type of permanent life insurance that contains an investment savings component like whole life insurance, but with lower premiums similar to term life insurance.
Universal life insurance policies generally have flexible premium payment options . This flexibility differentiates universal life insurance from term life and whole life insurance.
What You Should Know About Universal Life Insurance A big advantage to choosing universal life insurance is its flexibility, which allows you to decide how much you pay each year by accessing the policy’s cash value. Keep in mind that you will have to pay the minimum amount of the policy or else it will lapse.
Knowing the potential cash value of your Universal Life policy can allow you to use this money to skip a payment or leave it to accumulate cash value over time. Policy growth will vary depending on the specifics of your policy and various other factors.
The insurance provider you choose for your policy will provide you with a minimum crediting rate that will be detailed in your contract. That said, if the company earns more than the minimum interest rate, it may put the additional interest on your policy.
This is why universal life policies have the ability to earn more than whole life policies over time.
Is universal life insurance a good option?
A universal life insurance policy could be a good option if you are looking for the following:
- The flexibility to adjust premiums and coverage amounts.
- If you may need a cash value loan while you are alive.
- You need permanent life insurance protection and access to cash values.
Universal life insurance offers buyers:
- Flexible life insurance premium.
- An increasing level or benefit of death
- The insured gets a tax-deferred investment opportunity.
In addition, you may also pay additional premiums to your UL policy . This is called overfunding a policy and you would be adding money to the policy and building up its cash value. Over time, the cash value will earn interest with which you can borrow or contribute to the cost of the policy later.
The cash value account can earn fixed interest or be credited with earnings based on world indices. As long as the cash value exists, you may be able to skip payments for several months , a year, or even longer. In addition, the Universal Life policy can provide coverage for a lifetime if the cash value is able to sustain the cost of the insurance.