Life insurance is an essential tool in creating financial security for your family or beneficiaries. But have you ever heard about universal life insurance? It’s not just your ordinary life insurance policy. Universal life insurance offers the benefits of financial protection and the opportunity to grow your money while you’re alive. Let’s dive into the world of universal life insurance and discover how it can work for you.
How does universal life insurance work?
Universal life insurance falls under the category of permanent insurance. This means that the policy remains in effect until your death, as long as you make your premium payments on time. One of the unique features of universal life insurance is its cash value component. The cash value grows over time and can be accessed through loans or withdrawals. Additionally, you have the flexibility to adjust your death benefit and premium payments to suit your changing needs.
When you purchase a universal life policy, you and your insurance company agree upon a death benefit amount. You also designate beneficiaries who will receive the death benefit if you pass away while the policy is active. The premium you pay is proportional to the death benefit you choose. So, a higher death benefit will have a higher premium.
A portion of each premium payment goes towards the insurance coverage, administrative fees, and the cash value. The insurer then invests the cash value and pays you interest. The specific investment strategy and growth of your cash value depend on the type of universal life policy you have.
How to use your cash value
The cash value in your universal life insurance policy can be utilized in several ways:
Make a withdrawal
Similar to a savings account, you can withdraw funds from your cash value. However, be aware that the amount you withdraw will reduce the death benefit that your beneficiaries will receive upon your passing. If your withdrawal amount exceeds the amount you’ve invested in the cash value, the excess may be subject to capital gains tax. It’s best to consult with a certified tax preparer to understand the tax implications.
Take out a loan
You can also take out a loan against the cash value of your policy. The loan will accrue interest, and if you pass away before repaying it, the balance will be deducted from the death benefit.
Surrender the policy
If you no longer need your universal life insurance policy, you have the option to surrender it. This means canceling the coverage and receiving the accumulated cash value. However, the insurer will deduct any outstanding loan balances and fees. Similar to a withdrawal, any excess cash value may be considered taxable.
There are no restrictions on how you can use your cash value. Whether it’s paying for emergencies, supplementing your retirement income, or taking a dream vacation, the choice is yours. You can even use the cash value to pay the policy’s premium. Just keep in mind that if you pass away, your beneficiaries will not receive the cash value. It remains with the insurance company.
Types of universal life insurance
Universal life insurance comes in different variations. Here are three common types for you to consider:
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Guaranteed Universal Life (GUL): This type of policy allows you to adjust your premium and death benefit as your needs change. It typically offers a cash-value component that earns interest at a modest rate set by the insurance company. GUL is relatively low-risk and ideal for those primarily seeking insurance coverage.
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Indexed Universal Life (IUL): With an IUL policy, you can also adjust your premium and death benefit. The cash value is tied to the performance of a major stock index, such as the S&P 500. If the index grows within a specified period, the cash value of your policy will also increase. IUL policies have some limitations on gains and losses, providing a moderate level of risk and reward.
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Variable Universal Life (VUL): This policy type offers the highest level of risk and reward. Similar to the other types, you can adjust the premium and death benefit. The cash value in a VUL can be invested in a broader range of investments, including indexes, money market accounts, and individual stocks and bonds. A VUL requires more active management from the policyholder.
Universal life vs. whole life insurance
While both universal life and whole life insurance fall under the category of permanent insurance, they have some key differences. Whole life insurance offers a fixed interest rate on the cash value, whereas universal life insurance allows for a more variable growth tied to investments. Universal life also offers the flexibility to adjust your premiums and death benefit, while whole life features fixed premiums and death benefits.
Universal life vs. term life insurance
If you’re looking for a comparison between universal life and term life insurance, here’s what you need to know. Universal life insurance provides coverage until your death, while term life insurance lasts for a specified term, such as 10, 20, or 30 years. Term life insurance is a more straightforward form of coverage, lacking the cash-value component found in universal life insurance. Term life insurance typically costs significantly less than universal life insurance.
How much does universal life insurance cost?
The cost of universal life insurance varies based on various factors, including your age, gender, tobacco use, health condition, and the amount of death benefit you choose. It’s wise to shop around and compare quotes from different insurers. On average, a universal life insurance policy for a 40-year-old nonsmoker with a $1 million death benefit costs about half of a whole life policy and several times more than a term life policy.
Pros and cons of universal life insurance
Considering universal life insurance? Here are the pros and cons to consider:
Pros:
- Ability to modify premiums and death benefits as your needs change
- Offers a cash value feature for additional investment options
- Provides varying levels of risk and reward depending on the policy type
- Policy designed to stay in effect until death
- Cash value earnings can outperform traditional interest rates
Cons:
- Costlier than term life insurance (yet typically less expensive than whole life)
- Generally riskier than whole life insurance, depending on the policy type
- IUL caps may limit gains in exceptionally strong market years
- Cash value does not go to beneficiaries upon death
Best universal life insurance companies
Universal life insurance may not be as common as term life or whole life insurance, but it is offered by reputable companies such as State Farm, Nationwide, Mass Mutual, and Northwestern Mutual. These insurers have made the list of best universal life insurance companies published by U.S. News and World Report.
Should you choose universal life insurance?
Universal life insurance is suitable for individuals seeking financial protection and a way to diversify their investment portfolio or utilize life insurance for estate planning. It offers flexibility and the ability to adjust premiums and death benefits. However, universal life insurance can be complex, and it’s essential to discuss your needs with an independent insurance agent or investment advisor to ensure you make the right choice.
“TIME Stamp: Universal life offers a greater degree of risk and reward than other types of permanent insurance.”
If you are interested in permanent life insurance, universal life is worth considering. With its cash value feature tied to the stock market’s performance, universal life insurance offers more potential rewards and risks compared to other forms of permanent insurance.
Frequently Asked Questions (FAQs)
Should I cash out my universal life insurance policy?
You can access your cash value through a withdrawal or loan. However, it’s important to note that withdrawals may be subject to taxation, and any amount withdrawn will reduce the death benefit received by your beneficiaries. Loans accrue interest and unpaid balances are deducted from the death benefit.
Which riders are offered with universal life insurance policies?
Universal life insurance policies offer riders that can enhance your coverage. These riders include accelerated death benefit, accidental death and dismemberment, long-term care coverage, and waiver of premium.
What happens to cash value in a universal life policy at death?
Upon the policyholder’s death, the insurance company typically keeps the cash value. This is an important consideration when evaluating cash value life insurance policies.
Is universal life insurance a good investment?
Universal life insurance can be a good investment option if you have maximized other retirement savings options and want to diversify your investment portfolio. It’s best to consult with an insurance agent or financial advisor to understand the pros and cons and determine what suits your needs best.
For more information and personalized advice on universal life insurance, visit Personal Finances Blog. It’s time to secure your financial future and explore the possibilities of universal life insurance!