How Universal Life Insurance Works
A universal life insurance is a flexible permanent life insurance product that offers affordable protection of term life insurance and a savings component, similar to whole life insurance. This savings portion is invested in order to earn cash value. Every aspect of the policy can be reviewed and updated according to the changes in the insured’s personal circumstances. The interest from the savings part of the policy can be used to cover premium payments.
Universal life is the more flexible version of whole life insurance policies as it allows the owner to transfer money to and from the insurance and the savings components of the plan. The premiums are variable and can be broken down according to the two components of the policy. This allows the policyholder to adjust their premiums according to their personal circumstances. To illustrate, if the savings component is not performing well, the policyholder can opt to apply the low interest earnings to their premiums. With a universal life plan, the cash value of investments can be managed to grow by making monthly adjustments.
Savings and Loans
The premiums you pay go into your cash value account where it can earn interest. There are a number of monthly deductions from your account that you need to take note of including insurance protection charges. Under this policy, you will be able to borrow from the account value to cover your immediate financial needs. These loans will accrue interest and if unpaid will lower both the policy’s cash value and death benefit. The policy is kept active for as long as its cash value has enough funds to cover the monthly deductions.
You can make use of your universal life insurance policy for a number of purposes, including:
- Income replacement, mortgage payments and educational expenses
- Source of funds from unforeseen expenses
- Succession and estate planning, business planning and special needs
Universal Life Sub-Types
The universal life policy can either be a survivorship or joint life insurance. Under the survivorship plan the insurance covers two individuals paying benefits only after both insureds have died. This type of universal life plan costs less than if you take out two separate permanent life insurance policies. This policy is ideal for couples who would like to leave a more significant nest egg for their children upon their demise.
The joint universal life policy also covers two people but the death benefit is paid out upon the death of one of the insureds. You can protect your family as you accumulate a tax-deferred cash value. A joint universal policy is an affordable way of covering two individuals in a single policy. This policy is flexible as it lets you decide the amount of premium. The death benefit is tax free and the growth of the cash value is tax deferred so long as it is not removed from the policy. You can however borrow funds from the policy though it may have tax consequences.
Benefits of Universal Life Insurance
Your universal life insurance policy earns interest as you provide protection for your family. The savings component of the policy can earn a market sensitive rate of interest that is guaranteed to not go lower than a fixed percentage. With this policy you can plan for your various needs, particularly the security of knowing that your family will not be financially strapped should you suddenly pass away.
This policy can also provide funding for transferring interests in a family owned business. It can enable members of the family to continue operating the business left behind by the insured and pay off beneficiaries who do not want to be involved in the running of the business. The policy’s cash value can be accessed through a loan or a withdrawal and can be used to cover various expenses. The loans accrue interest and can impact the value of the death benefits and the savings portion of the policy.
A good advantage of purchasing this type of policy is that the insured may not have to shell out money for the premium after a period of time. When the savings component of the policy earns interest, it can be used to cover premiums. If you feel you will be needing insurance well into your 70s, then you should think about getting a universal life policy. This will enable the savings component of the plan to accumulate. An alternative to this type of policy would be the term life insurance plan coupled with a sound retirement investment savings account like a pension or a 401k plan.