Universal life insurance is one option to consider if you are looking for a policy that provides coverage for the rest of your life. You may modify your premium payments and access the cash value of your universal life insurance policy as needed.
What is Universal Life (UL) Insurance?
Universal life insurance is a type of permanent life insurance. Like other permanent insurance, it has a cash value component and covers you for life as long as you pay your payments.
This is a valuable tool if your cash flow changes often. You can also change the amount of your death payment.
That means you can lower your death benefit if you don’t need as much life insurance as you used to. Or, you might be able to get your death benefit amount raised, but you will probably have to answer more questions about your health to do so.
Benefits of Universal Life Insurance
In addition to protecting you for life, universal life insurance has a few other benefits:
Flexible Premiums
If the cash value of your account is enough to cover the costs, you may be able to lower or skip your payments on a universal life policy for a while.
When money gets tight, and you want to find ways to lower your regular bills, this could help. However, there can also be harmful effects; say you pay all the money in your account to cover payments, your coverage might end.
Remember that even though you can change your premiums, you need to keep your cash value positive, or your insurance will lapse, which means you won’t have any coverage.
Your insurance company may give you a grace period, a set amount of time to pay and return your policy to a positive cash value before your coverage ends. To find out more, read your contract or call your insurance company.
Take Money Out or Borrow Against It
Universal life insurance has a premium that is paid every month. Part of that payment goes toward the death payout. It also builds up the cash value of the insurance with another part.
Over time, as money builds up in the policy, you may be able to borrow against it or take money out of it (the amount available will change by the company). Each insurance company and policy has rules about when and how you can do this. But it’s important to know that this could lower your death benefit, change how you pay taxes, or even cause your policy to end.
Change the Death Benefit of the Policy
The death benefit of universal life insurance can also be changed if you die. Sometimes, you might want to raise the amount paid when you die. Insurance companies will let you do this if you pass a medical test.
You could also lower the death benefit to cut the insurance cost. Remember that your pay rate may also increase if you raise the death benefit.
You Can Earn Interest on the Cash Value of Your Insurance
The Insurance Information Institute says that the cash value of a universal life policy gets interest that is about the same as the interest rates on money markets right now.
Of course, you should remember that the interest rate will change with the market. This means that the interest you get may also go down. But some companies protect you from that with a strategy that promises at least some results.
Types of Universal Life Insurance
You can find different kinds of universal life insurance by going through the general term “universal life insurance.” The following policy choices are available:
Variable Life Insurance
When you get variable universal life insurance, you get lifelong life insurance with a cash value part. You can put some or all of your cash value into a different account made up of investments on your terms.
This life insurance gives your family a death benefit that is not taxed, and you also have more say over how the cash value part of your coverage is invested and managed.
This could give you much higher returns based on how aggressively you spend, but you’ll also have to deal with the market risk of investing in the stock market.
You can pay different amounts for payments with variable universal life insurance, which may sound like the best of all possible worlds. Many experts, though, don’t suggest variable universal life insurance because of the high costs that come with it.
Guaranteed Universal Life Insurance
It is called guaranteed universal life (GUL) insurance, and it has a death payout and premium payments that don’t change.
Most of the time, you’ll pick an age (like 90, 95, 100, 105, 110, or 121) when the policy stops. If you choose a higher age, the price will go up.
Most of the time, guaranteed universal life insurance doesn’t have much cash value and is the least expensive type of universal life insurance we sell. You’re not paying for the chance to get a lot of cash, and you’re paying for covering for life.
GUL is sometimes known as “no lapse guarantee universal life insurance.” In recent years, traditional, non-guaranteed universal life insurance plans have expired because the cash value wasn’t enough to cover the costs of the policy and the cost of insurance.
Some policyholders who wanted to keep their insurance had to pay much higher fees than they thought they would. Newer rules that don’t expire say they will stay in effect.
There is a catch: the policy will probably end if you pay late or don’t pay at all. It won’t have any monetary value, so there won’t be any to take away. The company will keep the money you paid for protection.
Indexed Universal Life Insurance
This type of permanent coverage has a cash value, but the main change is where the money is kept. With indexed universal life insurance, you can put your cash value account money to work by investing it in a stock market index like the S&P 500. This will make you interested based on the index.
Many indexed universal life plans also have a “floor” interest rate that says you’ll never get a return that is less than that rate.
The best thing about this kind of insurance is that you can get higher returns over time, and you’ll also get a minimum rate of return every time. Your policy’s cash value grows tax-free, and if you die, your heirs will get a death benefit that they won’t have to pay any federal taxes on.
If the stock market isn’t doing well, your returns on adjusted universal life insurance may be low. Also, your returns will always be lower than an index because your insurer keeps some of the gains to make money.
How Does Universal Life Insurance Work?
As you pay your premiums, the insurance can build up “cash value.” It’s usually built with some of your extras. In some types of universal life insurance, this cash value can be spent by either you or the insurance company. It grows over time.
There are many ways to use cash value over the policy’s life. It can be used to pay payments, get a loan against the policy, or even add to your retirement income.
Your beneficiaries will get a death benefit, a set amount of money you choose. They should know they won’t get any cash value from most plans. The death benefit, on the other hand, is usually not taxed as income.
Drawback of Universal Life Insurance
Below are some of the drawbacks of universal life insurance:
Risk of Having to Make Significant Payments or Having Policies End
Universal life insurance is flexible because you can lower your payments and take money out when needed. However, you need to keep a close eye on your account. Your policy can end if the cash value drops to zero and your payments don’t cover the cost of insurance.
There is No Guarantee of Returns
Your cash value might not do well if interest rates go down. Universal life cash value does not earn a fixed rate like whole life does. There is, however, a minimum rate on most UL insurance that keeps your losses in check.
Certain Withdrawals are Taxed
People who own UL policies must pay taxes on the cash value they take out. Life insurance is usually treated using the first-in, first-out (FIFO) method. This means that the policy owner will get their investment back first, then any gains in the policy (or being taxed on those gains).
You will be taxed on the money you take out, which is more than what you put into the insurance.
When the Policyholder Dies, the Cash Value is Lost
The insurance company keeps the account’s cash value when the insured dies. Your family will only get the death benefit because the policyholder can only use the cash value while they are still living. However, some types of life insurance let you raise the death payout as the cash value grows.
How Does Whole and Term Life Insurance Compare to Universal Life Insurance?
Term life insurance and whole life insurance are the two main types of life insurance. Term life insurance only covers you for a certain amount of time, usually between 10 and 30 years. On the other hand, whole life insurance covers you for life and often has a cash value part.
The most common type of universal life insurance is whole life insurance. As with most whole-life policies, the premiums are much higher than those for a similar term life policy because your beneficiaries are guaranteed to get money when you die if you keep paying the premiums.
Also, you can sometimes get term life insurance without a medical exam. But for whole life insurance, including most universal life insurance plans, you usually need to get a physical to be eligible for coverage.
Conclusion
Many people who think their costs will go down as they get older don’t need permanent life insurance and shouldn’t pay the higher rates that come with a universal life policy. But if you understand that you need coverage and don’t want to stress about being covered as you age, you might want to look into general life insurance.
UL policies let you change the rates to a certain point so they can be cheaper than whole life insurance. You must ensure that the cash value doesn’t drop so low that you must pay huge premiums or the insurance ends.
