Universal life insurance is a type of permanent insurance with flexible offers that includes investment savings elements and low premiums. With Universal insurance, individuals are able to reduce or increase their death benefit and pay their premiums at any time in any amount once there is money in the account. However, this amount is subject to certain limits.
Essentially, when you make a payment to your plan, a portion will go to the death benefit while the other portion will go into an investment account. What’s even better is that any interest accrued since your first deposit will be credited to the account.
The cash value is guaranteed to grow in correlation with the minimum annual interest rate. With that said, this value has the potential to grow faster but will depend on the insurer’s market performance.
Difference Between Universal and Whole Life Insurance
Many people confuse Universal and Whole life insurance. While both are permanent life insurance, there are few key differences that help to distinguish the two.
- Universal life insurance offers a variety of different payment options. Whole life insurance, on the other hand, offers fixed level premiums. This means payments stay the same throughout the life of the policy.
- With Universal life insurance, you might be able to skip premium payments contingent upon whether the cash value is enough to cover expenses for that month, unlike Whole insurance
- The premiums with Universal insurance are generally lower when there are periods of high-interest rates.
- Interest is adjusted monthly with Universal insurance while adjusted annually with Whole insurance.
Advantages of Universal Life Insurance
Increase of Cash Value
One of the greatest benefits of a Universal life insurance premium is the ability to increase cash value. Universal life doesn’t pay dividends; however, policyholders can expect cash value growth, loan collateral, and premium payment benefits.
It’s important to note that Universal life policies can calculate growth in 3 different ways.
- Surrender Value: If you decide you no longer want your policy, you can give it back to the insurer. In return, the insurer will give you the cash value.
- Loan Collateral: This is when you borrow money from the insurer and use the cash value as collateral. Keep in mind, these policies are subject to interest rates, which are set by the insurer.
- Premium Payments: You can use the cash value to pay a portion or an entirety of the premium payment. However, policies can lapse if the cash value falls to zero. For this reason, it’s going to be important to monitor the amount of cash value you have in your policy.
With Universal insurance, individuals can increase or decrease their death benefits based on needs as long as sufficient money is paid into the premium to keep the policy going. This means that if you run into a financial rut, you can get access to your money to meet your financial needs.
It’s important to note that while you can make withdrawals, repeated withdrawals will lessen your cash flow. With that said, if you plan to make continuous withdrawals, keep in mind that an unexpected emergency can occur. In this case, it’s a good idea to have enough cash flow to meet the financial obligations of these expenses.
Universal policies also allow for premium payments to be increased, decreased, and even skipped. However, this will depend on certain factors such as the amount of premium you’ve paid into the policy. In addition, individuals have the ability to adjust their death benefits without needing to buy a new policy so long as it’s within the plan limits.
Even more, some Universal life policies offer guarantees up to age 100. This is great for those looking for an extensive policy that can provide security.
Death Benefit Protection
Another excellent advantage of Universal life insurance is its death benefit protection. A death benefit is a payout to the beneficiary of a life insurance policy, annuity, or pension when the insurer passes away.
Investing in Universal insurance means you are always protected as long as you pay sufficient premiums. This can give you peace of mind and a sense of security knowing that your beneficiaries are set financially.
Guaranteed Interest Rates
Universal life insurance plans are also a great option due to guaranteed interest rates. This means that your cash value will continue to grow over time. The more cash value you have, the more financial security you can create for you and your loved ones.
This type of insurance also has great tax advantages for policyholders. For starters, death benefits paid to beneficiaries are free from federal income tax. In addition to this, any loans that you take out against your policy are free of penalty and federal income tax.
It’s important to consider that if your policy lapses or if you surrender your policy and have an outstanding loan, a portion of the cash value could be taxable.
Things to Consider
The flexibility of Universal life insurance is a convenient option but this means that individuals must be responsible as well. It can be easy to miss payments, underpay, and even underfund your account. For this reason, t it’s important to stay on top of the value of your account to avoid making a series of large payments to catch the account back up again.