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.
In short, the main benefit of universal life insurance is the lifelong protection it offers, and besides that, its main additional features you have to know about are:
Your cash value earns interest
When you pay your premium on a universal life insurance policy, a portion of each payment goes toward paying for the death benefit, and the other portion of the money goes to building up the policy’s cash value.
You can withdraw money or borrow against the policy’s cash value
By paying the premium of the universal life insurance policy, over time, and after the money has accumulated, you may be able to withdraw or borrow against the cash value of the policy
You have flexibility with premiums
It is important to know that even though universal life insurance premiums are flexible, you must maintain a positive cash value, or else your policy will no longer provide coverage
You can adjust the death benefit
The flexibility of a universal life policy also extends to the death benefit but keep in mind that if you increase the policy’s death benefit, it may increase the premium you pay.
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.
A universal life insurance policy is best for people who wish to have long-term insurance and who have enough funds to pay for one. The right life health insurance for you will depend on your family’s needs and overall financial situation. For example, if you’re more interested in providing a replacement source of income for your spouse and children, then a term life policy is most likely a better option for you.
Also, think about your appetite for risk and desire for flexibility. If lower and more flexible premiums seem appealing to you, and you don’t mind the somewhat unreliable policy interest rate on which the potential growth of your savings fund depends, then universal life insurance might be a great option for you.
There are three types of Universal life coverage and they are:
Indexed universal life insurance 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.
Variable universal life insurance 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.
Guaranteed universal life insurance or no-lapse guaranteed, universal life insurance (GUL) is a type of policy that can provide you with a guaranteed death benefit and premiums that stay the same for as long as the policy is active. Guaranteed universal life policies usually have an end date that’s selected at the time of purchase even though they are included in the permanent life insurance category. The policy will remain active until a certain point, also known as an advanced age, which the policyholders choose themselves. Unlike other permanent life policies, a GUL policy may have little or no cash value.
Universal life insurance can be used as an investment vehicle and is at its core more flexible. The possible downside of universal life’s flexibility is that policy premiums may increase. Nevertheless, you are able to adjust coverage amounts, premium payments, and death benefits.
Term life insurance is the simplest form of life insurance and typically has lower premiums. Term life is usually less expensive than a permanent coverage whole-life policy. Also, unlike permanent life insurance, term policies have no cash value component, no payout after the term expires, and no value other than a death benefit.
You will be assessed for your age, health, smoking status, lifestyle hazards, driving record, and more. The younger and healthier you are, the less expensive your policy will be.
To learn more about universal life policies, contact Texas Medicare Advisors today by calling 512-900-3008.
Complete the form to instantly get access to our free book.