What Is Universal Life Insurance?
The appeal of universal life insurance, like other types of permanent life insurance, is that it will have some cash value as well as providing death benefits. Universal life offers flexible premiums, flexible coverage and adjustable benefits. These are reasons why it appeals to young families whose needs are likely to change over time.
What exactly does flexible premium mean? It means you choose what level of premium you want to pay within a predetermined range. You can set it up to fit your changing needs. In general, the premiums must be sufficient to cover the features of the insurance policy you selected as well as policy expenses. Any premium amount above that amount will add to the cash value of the policy.
This cash value is a tax sheltered amount and with universal life insurance the cash value earns interest. If you choose a lower premium, very little of it will be available to increase your cash value. There are regulations that determine minimum and maximum percentages of your premium that are directed to the insurance and to the cash value for the investment component. That's to prevent people from adding unlimited amounts to the tax deferred investment portion and calling it insurance. If you exceed those amounts, your policy may no longer have tax deferred status.
You will also have some choices about what you can do with the cash value of your policy. You can simply allow it to accumulate and it will be paid out along with the death benefit. However, if you need funds you can withdraw some of the cash value or borrow against it. The ability to pay no premiums in some months is related to the cash value in the policy. If you pay no premium, the cash value of your policy is reduced. Because there are so many flexible aspects of the universal life insurance policy, it is extremely important that you ask questions to understand clearly what your options are. Be sure to ask what is guaranteed. Is the death benefit guaranteed? Is there a guaranteed premium even if your health status changes? Is there a guaranteed minimum interest rate? What happens to your policy if you are disabled or otherwise unable to make your payments? Do you need to keep the policy for a specific length of time in order to access the cash value? Are there any penalties involved? These are only a few of the issues to be considered before you purchase universal life insurance policies. It can be a good choice depending on your circumstances. Just be sure you know as much as possible so that you get maximum benefit from the flexibility without unpleasant surprises.
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