Universal Life Insurance
What is Universal Life Insurance?
Universal Life is a highly flexible form of permanent life insurance. “Permanent” means that Universal Life is intended to last until the insured passes. As long as the policy remains in force, at the time of the insured’s passing, the person(s) named as beneficiaries receive a federal tax-deferred death benefit from the insurer.
Universal Life policies offer both this valuable death benefit and the opportunity to build “cash value” (interest credited on a portion of paid premiums). It’s invested by the insurance company and accumulates on your behalf tax-free. Cash value is money that can be borrowed or withdrawn from the policy, in whole or in part. Cash value can provide funding options for the future, such as retirement or other ongoing expenses. It is, however, important to keep in mind that funds that are borrowed or withdrawn, during your lifetime will affect the cash value of the policy, reduce your death benefit, and may be subject to federal income taxes.
How Universal Life Insurance Works
Universal Life’s flexibility means that the premiums and death benefit can be customized from year to year, although increases to the death benefit are always subject to insurability. Within certain limits, choosing the amount and timing of the premiums is an option. This determines how the policy’s cash value develops. Each policy month, a payment to cover the cost of the insurance protection is deducted from the policy value. If preferable, Universal Life can also be structured to serve as a level-premium, lifelong alternative to term life insurance.
Premiums for Universal Life are generally higher than premiums for term life, which may mean a more expensive option for those just starting out. However, since term life insurance will eventually have increasing premiums and will often require a new medical exam to continue or increase coverage, term life costs can end up being very expensive in the long run. Universal Life offers an option for younger families to enjoy the security of a guaranteed death benefit coupled with a level premium that is competitive, over time, with the costs of term life.
There is also a risk of the policy lapsing if the premiums are not paid, or if the policy’s cash value is no longer sufficient to cover the cost of the policy. A secondary guarantee can be added to a Universal Life policy to protect against a lapse in cash value. This guarantee ensures that the policy will remain in force for the guaranteed period, as long as minimum premium payments are made.
The Advantages of Universal Life Insurance
Flexibility of payments, tax-deferred cash value accumulation, and numerous coverage options are just a few of the many reasons for the popularity of Universal Life. This type of life insurance can be a key component of both retirement income planning and estate/tax planning strategies. Universal Life can be used to provide solid financial protection, well into the future for family members, a business, or a favorite charity.
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