Among all of the life insurance policies in the market, Universal Life Insurance is one of the best life insurance options available for lifelong coverage. It provides a payout known as a death benefit, paid to your beneficiaries tax-free. Universal life policies also build cash value while your gains grow tax-free. It might also provide flexibility to adjust your premium payments and death benefit, usually depending on the policy. Let us tell you more about Universal Life Insurance.
What Is Universal Life (UL) Insurance?
Universal life insurance is permanent coverage that lasts the entire lifetime of an individual. It also includes some investment savings elements and low premiums, similar to those of term life insurance. Although most UL insurance policies contain a flexible-premium option, some may require a single premium (single lump-sum premium) or fixed premiums (scheduled fixed premiums).
How Universal Life (UL) Insurance Works
Universal Life Insurance can cover you for the duration of your life as long as your premiums are paid. It also builds up cash value, further growing your investments gains. You can withdraw money out of the cash value using a withdrawal or loan. This may result in the insurance company reducing the payout to your beneficiaries by the number of withdrawals or outstanding loans in the event of your passing. But for some buyers, accessing cash value may be more important than a complete payout to beneficiaries later on.
Benefits of Universal Life (UL) Insurance
Universal Life Insurance ensures benefits other than lifelong coverage too. Some of these are:
- The ability to Withdraw Money or Borrow Against It
When you pay your premium on a universal life insurance policy, a portion of each payment made goes toward paying for the death benefit. But, another part also goes to building up the policy's cash value. After money has accumulated for some time, you may be able to withdraw or borrow against the policy's cash value. However, it's vital to know that this could reduce your death benefit, create a tax implication or even cause your policy to lapse.
- Earn Interest on Your Policy's cash value
The Insurance Information Institute (III) says that the cash value of a universal life policy usually earns interest in line with current market rates. However, it's also important to note that the interest rate will vary along with the market, which means the interest you receive may also decrease or increase. But, some companies offer protection with a minimum performance guarantee on the policy.
- Flexible premiums
You may have the ability to lower or stop paying your premiums on a universal life policy if the cash value of your account can cover the costs for a certain amount of time. This can be helpful if your finances become tight and you're looking for ways to lower monthly bills. But, there can also be negative consequences. For instance, your coverage may come to an end if you use up the cash value to pay for premiums.
Types of Universal Life Insurance
- Guaranteed Universal Life Insurance
A guaranteed universal life (GUL) insurance policy offers a death benefit along with premium payments that vary over time. First, you select an age at which the policy ends, usually between 95-121. The higher the age, the higher the premium. Guaranteed universal life insurance is the cheapest kind of universal life insurance as it has little or no cash value.
- Indexed Universal Life Insurance
Indexed universal life insurance (IUL) offers lifelong coverage and flexibility with the death benefit and premiums. You may be able to adjust your death benefit and payments within certain limits if your needs or budget change. A cash value component in IUL is often tied to a stock market index or a combination of indexes. You also have the option to choose a fixed interest rate option for cash value.
- Variable Universal Life Insurance
Variable universal life (VUL) insurance allows you to vary premium payments and the death benefit amount within certain limits. You'll mostly need to actively manage this kind of policy because you'll be selecting sub-accounts for your cash value investments. You also have the option to choose a fixed interest rate option for cash value.
You don't want to outlive your money, but you also need life insurance for those who depend on it. For example, a universal life insurance policy can fund a trust to take care of your loved ones after you're gone, and it might be an option if long-term savings goals are essential. You may also consider a universal life insurance policy if you have significant long-term savings goals and need both an investment vehicle and life insurance only after you've maximized other savings options, such as retirement plans.