What Is Universal Life Insurance?
The ideal life insurance policy for your needs will depend on a number of criteria, including who depends on your income and whether you wish to invest any of the money. Universal life insurance is a kind of permanent life insurance policy that provides more flexibility but could be more difficult to understand than other types of plans.
A type of permanent life insurance called universal life insurance provides both a death payout and a cash value element. As long as the payments are paid on time, the policy will be in force for the duration of the insured person’s life. Indexed universal life, variable universal life, and guaranteed universal life are the three different types of coverage.
In contrast to other forms of permanent life insurance, this type of policy allows policyholders to adjust the size of the death benefit or have flexible premiums. Additionally, the cash value component has the potential to pay out more interest; on the other hand, its value may decline with time.
More specifically, the interest earned on the cash value component is based on the money market rate of interest or, in the case of some universal insurance policies, a rate based on a market index. Whatever you make will raise the value of your investment, which will aid in covering your premium. If your financial condition changes, reducing your monthly payments may be helpful.
Remember that doing so will deplete your cash value; if there is not enough, you must pay the shortfall to keep your policy in force.
How Does Universal Life Insurance Work?
Although your insurer may set a cap on your rate of return, index universal life insurance (IUL) enables you to receive interest that is correlated with the performance of index funds like the S&P 500. Alternately, you might have the option to decide to earn all or some of your cash worth in a fixed-rate account.
The cash value component of a policy can be invested in any way the policyholder chooses with variable universal life insurance (VUL). Stocks, bonds, and mutual funds are available options; you can even decide to invest across different accounts.
A form of policy known as guaranteed universal life insurance (GUL) gives a guaranteed death payout and premiums that remain constant for the duration of the policy. Despite frequently falling under the category of permanent life insurance, GUL plans typically have an end date that is decided upon at the time of purchase. Typically, policyholders select an advanced age (95, 102, etc.), and the policy will be in effect up to that time. A GUL policy may have little to no cash value, unlike other permanent life insurance policies.
Your universal life insurance policy’s cash value will increase as long as you continue to pay your premiums. You may have to pay the amount upfront or through set monthly installments, depending on the insurer and the policy you finally choose.
Regardless of the type of universal policy you have, as long as the cash value in your policy is present, your funds will continue to grow income-tax-free. However, depending on the type of universal policy you have, the cumulative value could decrease if your investments perform poorly. But once you take money out, you’ll have to pay taxes, and your death benefit can go down. You can keep most or all of your collected cash value if you decide to cancel your insurance.
One exception would be if you took out a loan based on your cash value. If you repay the whole amount while your policy is still in effect, the loan amount is not taxed. Your insurance may lapse if the total amount you borrow (including interest) is greater than the available funds.
Your beneficiaries will only get the life insurance payout after you pass away and your policy is still in effect; the insurance company retains any assets in excess of this amount. Beneficiaries often pick either a single tax-free payment or a series of quarterly, semiannual, or annual payments. As an extra choice, some insurers provide annuities, which are contracts in which the insurer agrees to give the recipient a single payment or ongoing payments for a defined period of time.
Compare Term, Whole, and Universal Life Insurance
Both universal and whole life are types of permanent life insurance that include both a cash value and death payment. Although you can utilize your policy as an investment vehicle with any type of life insurance, the primary distinction is how the cash value develops over time.
A whole life insurance policy gives a guaranteed set interest rate and a constant premium. Also certain is the amount of your death benefit. Whole life premiums are typically more expensive than universal life rates because of all of the aforementioned factors.
On the other hand, because the interest rate varies based on the sort of investment that your insurer selects, universal life does not guarantee returns on your cash value. Your accumulated assets will decrease if your investments perform poorly, which could lead to increased premiums. Undoubtedly, the investments you make for your universal life insurance policy could perform well, perhaps even better than what whole life insurance can offer, which would mean reduced rates.
You can either surrender your policy or borrow money against its cash value depending on the policy. Your beneficiaries’ compensation will be lessened if you do this.