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.

hOW DOES UNIVERSAL LIFE INSURANCE WORK?

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.