Universal Life Insurance
If you are an adult, and especially if you’re a parent, you know that there are many life events that you’ll need to deal with over your lifetime. Unfortunately, if your life insurance is a Term or Whole Life policy, your coverage and your payments are pretty much etched in stone. If you need additional insurance as your debt increases or if you need less insurance since you paid off your mortgage, there’s not a whole lot you can do about unless you have a flexible Universal Life Insurance policy.
What is Universal Life Insurance?
Universal Life insurance (UL) is a form of cash value life insurance that is reasonably priced (a little higher than term insurance) but referred to as permanent coverage (similar to whole life).
This life insurance policy has a cash account connected where a portion of the premium payment is deposited and earns interest that is tax-deferred. The cash account is available to the policyholder through policy loans and partial surrenders which are considered a return of premium and are not taxable up to the basis paid into the policy.
Under the Hood of Universal Life Insurance
The Universal Life policy was developed to give policyholders flexibility in a permanent insurance policy. When life events are experienced by the policyholder, the amount of death benefit can be changed, and the periodic premium can be changed as well.
As the cash value account builds up over time, those funds can even be used to cover the periodic premium when necessary or can be accessed as a non-taxable loan or partial surrender. As long as the cost of insurance is paid, either through periodic premium payments or from the cash value account, the policy will remain in force for as long as you need it to.
The Advantage of the Cash Value Component
Even though universal life and whole life policies both have cash value accounts, and both are assigned a minimum rate of interest, with universal life, if the insurance company’s portfolio outperforms the minimum assigned rate, the excess earnings are applied to the policy’s cash value account. This potential of crediting more than the minimum interest is what differentiates the universal life policy from the whole life policy.
If a policyholder borrows against the accumulated cash account, the death benefit is not affected unless the loan is not completely paid off at the time of the policyholder’s death and the cash account continues to earn interest. Any unpaid loan balance is deducted from the face amount before the death benefit is paid to the beneficiary. If the policyholder elects to surrender all or a portion of the policy, these funds are considered non-taxable up to the premiums paid into the policy.
The Flexibility is What Consumers Love Most
A lot of consumers may be satisfied with buying life insurance, filing it away, and then forgetting about it until the worse thing happens. But for a large number of consumers, the capacity to change their coverage and premium payments to accommodate life events that are typically bound to happen is a primary part of their insurance purchasing decision.
- Can I increase or decrease the death benefit if I want to?
- Can I miss a payment if I’m short on funds?
- Can I increase my payment so I build cash value quicker?
- Can I take cash out of my policy if I have an emergency?
- Can I temporarily reduce my premium payments if I need to?
When you purchase Universal Life Insurance, all of these questions are answered “yes.” For this reason, term insurance and whole life insurance are unlikely to be the best fit for your needs. For many people, having flexible living benefits is just as important as a death benefit. If this is how you feel, Universal Life Insurance is your solution.