Universal Life Insurance is a type of whole life insurance (lasts until the death of the policy holder, unlike term insurance with coverage is available only for a specified number of years. The difference from conventional whole life is insurance is that the universal life insurance policy is based on cash value and gives flexibility to the policy holder to change future premiums and coverage to suit their current needs.
Here are the benefits of universal life insurance. Universal life insurance premiums are broken down to the cost of insurance portion and the cash value portion. The cash value portion is credited each month with interest and therefore has a chance in increase in value on top of the death benefit. Therefore, universal life insurance can be used as an investment. Because the cash value in contributed to with after-tax dollars, only the earnings on the premiums is taxable. Policy holders can increase their premiums to hasten the increase in the cash value of their account, which, when reaches a certain amount, can decrease or even skip premium payments as they choose. This is only possible as long as the cash amount is sufficient to cover the cost of insurance.
Should the policy holder’s situation change, in that they do not need as much death benefit (for example, the policy holder has children when the policy is originated but the children are now grown), Uninversal Life Insurance allows the option to lower the benefit, therefore lowering the premium and visa-versa.
Policy holders may also borrow against their cash value tax free, because a loan is not considered income. But of course the loan must be paid back. Should the policy holder decide to surrender the policy, the cash value is theirs to withdraw, minus any applicable surrender fees. Tax is applied to only the interest earnings, so the premiums deposited is still virtually tax free.
The same goes for a second type of universal life insurance called Variable Universal Life Insurance. Here, the cash value is put into several accounts like mutual funds. The earning potential of the cash value is greater, but also their is risk of no earnings.
Choosing which type of life insurance is based on the policy holders needs and expectations and should be considered carefully. Talking to a qualified insurance agent will help you make the best decision for you and your family.
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