Universal Life is a type of permanent life insurance that has low monthly premiums, similar to term life insurance. As a whole life policy, universal life pays a death benefit to the insured’s beneficiaries after the insured dies. The insured can access a savings component, the cash value, of the policy during their lifetime. This savings grows along with market value or the minimum interest, whichever is higher.
With a universal life policy, you pay to cover the cost of insurance (COI). The cost of insurance is the minimum amount required to keep the policy active and covers charges for mortality, administration fees, and costs to keep the policy in force. If you pay more than the COI in premiums, the extra goes into the cash value. As the cash value grows, it can be used to help cover the rising cost of insurance over your lifetime.
You can access the cash value over your lifetime but will be taxed on the withdrawals. Borrowing against the accumulated value has no tax implications, however. You will have to pay interest on any loans and if unpaid, this amount will be deducted from your death benefit.
Another benefit of universal life is its flexible premiums. Whole life insurance policies have fixed premiums throughout the life of the policy, which can be expensive and are usually upward of $200 each month. With a universal life policy, you can remit premiums that are more than the COI. Your accumulated cash value may even be able to cover your premiums, allowing you to skip payments. The policy will remain in force as long as you continue to cover the COI.
Universal life policies give you the security of a whole life policy with the costs of a term life policy. You can buy a policy with a death benefit of $100,000, $250,000, $500,000, or $1,000,000. Your beneficiaries are guaranteed to receive this benefit as long as you continue to pay your premiums and keep your policy in force.
Beyond the regular universal life are variable universal life (VUL) and indexed universal life.
Variable universal life has special considerations regarding the savings component. There is usually a maximum cap and minimum floor on the gains made for the savings. These policies use investment sub-accounts that are structured like mutual funds with an array of stock and bond accounts. The growth to these accounts is tax-deferred and can be accessed by withdrawals or borrowing funds.
Indexed universal life lets the insured allocate the cash value to fixed accounts or equity index accounts. Money is not directly invested in the stock market. Usually, these policies have a minimum fixed interest rate. Index gains are credited to the cash value based on a percentage rate on a monthly or annual basis. The cash value is tax-deferred.
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