What Is Universal Life Insurance And How Does It Offer Flexibility And Control?

 

Life insurance is a vital financial tool that can protect your loved ones from the unexpected loss of your income. But not all life insurance policies are created equal. Some policies offer more than just a death benefit; they also feature a cash value component that can serve as a savings or investment account.

Universal life insurance is a type of permanent life insurance that lasts for your entire life, as long as you pay the premiums. Unlike term life insurance, which only provides coverage for a specific period of time, universal life insurance also accumulates cash value over time. This cash value can be used for various purposes, such as borrowing or withdrawing cash from it, or using it to pay policy premiums.

There are different types of universal life insurance policies, each with its own advantages and disadvantages. Some of the most common ones are guaranteed universal life, indexed universal life, and variable universal life insurance. In this article, we will explain how universal life insurance works and how it offers flexibility and control to policyholders.

How Universal Life Insurance Works

When you buy a universal life insurance policy, you pay a premium to the insurance company. The premium is divided into three parts: the cost of insurance, the cash value account, and the insurer’s fees and charges.

The cost of insurance is the amount that the insurer charges to provide the death benefit to your beneficiaries in case you die. The cost of insurance depends on factors such as your age, health, gender, and the amount of coverage you want.

The cash value account is the part of the premium that goes into a savings or investment account within the policy. The cash value account earns interest or investment gains based on a benchmark index or a portfolio of investments. The interest rate or investment performance can vary depending on market conditions and the type of policy you choose.

The insurer’s fees and charges are the expenses that the insurer incurs to administer and manage the policy. These include commissions, administrative costs, mortality and expense charges, etc.

As you pay premiums and interest accrues, the cash value builds over time. The cash value also reduces the insurer’s risk and liability over time. This is because the cash value offsets part of the death benefit that the insurer has to pay if you die. For example, if your policy has a $100,000 death benefit and a $20,000 cash value, the insurer’s net liability is only $80,000.

One of the benefits of universal life insurance is that you can access the cash value in various ways. You can borrow against it, withdraw from it, or surrender the policy for it. However, each of these options has its pros and cons.

• Borrowing against the cash value: You can take out a loan from your policy’s cash value at a low interest rate. The loan does not affect your credit score or tax liability. However, the loan reduces your death benefit by the amount of the loan plus interest until you repay it. If you die before repaying the loan, your beneficiaries will receive a reduced death benefit.
• Withdrawing from the cash value: You can withdraw money from your policy’s cash value up to the amount of premiums you have paid into it. The withdrawal does not affect your tax liability or your death benefit. However, if you withdraw more than the amount of premiums you have paid, the excess amount will be taxed as ordinary income.
• Surrendering the policy for the cash value: You can cancel your policy and receive its cash value in a lump sum. The surrender does not affect your credit score or tax liability up to the amount of premiums you have paid. However, if you surrender your policy before it matures or before you reach a certain age (usually 65), you may have to pay a surrender charge or penalty. Also, you will lose your coverage and forfeit any remaining death benefit.

How Universal Life Insurance Offers Flexibility

Unlike other types of permanent life insurance, such as whole life insurance, universal life insurance offers flexibility in premium payments, death benefits, and cash value accumulation.

• Flexible premium payments: You can adjust your premium payments within certain limits, depending on your cash value balance, your coverage needs, and your budget. You can pay more than the minimum required amount to increase your cash value faster or reduce your future payments. You can also pay less than the minimum required amount to use your cash value to cover the difference. You can even skip payments for a while if you have enough cash value to keep the policy active. However, you should always make sure that your cash value is sufficient to cover the cost of insurance and the fees and charges, otherwise your policy may lapse.

• Flexible death benefit: You can increase or decrease your death benefit amount within certain limits, depending on your cash value balance, your coverage needs, and your insurability. You can increase your death benefit if you need more protection for your beneficiaries, but you may have to undergo a medical exam and pay higher premiums. You can also decrease your death benefit if you need less protection for your beneficiaries, but you may have to pay a surrender charge or penalty. However, you should always make sure that your death benefit is at least equal to the minimum required amount by law or by the insurer, otherwise your policy may lose its tax advantages.
• Flexible cash value accumulation: You can choose from different types of universal life insurance policies that offer different rates and methods of growth for your cash value account. You can opt for a guaranteed universal life policy that offers a fixed and low interest rate for your cash value, but with more stability and certainty. You can also opt for an indexed universal life policy that offers a variable interest rate for your cash value based on the performance of a benchmark index, such as the S&P 500, but with more growth potential and risk. You can also opt for a variable universal life policy that offers a variable interest rate for your cash value based on your choice of investment options within the policy, such as stocks, bonds, mutual funds, etc., but with more control and responsibility.

How Universal Life Insurance Offers Control

In addition to flexibility, universal life insurance also offers control over your policy and your cash value. You can access your cash value through loans or withdrawals without affecting your credit score or tax liability (up to a certain limit). You can also use your cash value to pay for your premiums or increase your death benefit (up to a certain limit). You can also switch between different investment options within your policy without incurring any tax consequences (up to a certain limit). You can also surrender your policy for its cash value if you no longer need or want it (subject to surrender charges or penalties).

• Accessing your cash value: You can access your cash value through loans or withdrawals without affecting your credit score or tax liability (up to a certain limit). This can be useful if you need some extra cash for emergencies, opportunities, or expenses. However, you should be careful not to reduce your cash value too much or too often, as this may affect your death benefit or cause your policy to lapse.
• Using your cash value: You can use your cash value to pay for your premiums or increase your death benefit (up to a certain limit). This can be useful if you want to reduce or eliminate your future payments or enhance your protection for your beneficiaries. However, you should be careful not to use up all of your cash value, as this may affect your policy’s performance or cause it to lapse.
• Switching between investment options: You can switch between different investment options within your policy without incurring any tax consequences (up to a certain limit). This can be useful if you want to adjust your risk and return profile or diversify your portfolio. However, you should be careful not to switch too frequently or too drastically, as this may incur fees and charges or affect your policy’s performance.
• Surrendering your policy: You can surrender your policy for its cash value if you no longer need or want it (subject to surrender charges or penalties). This can be useful if you have other sources of income or protection or if you find a better alternative. However, you should be careful not to surrender too early or too late, as this may result in losses or missed opportunities.

How to Choose the Right Universal Life Insurance Policy for You

Choosing the right universal life insurance policy for you depends on several factors, such as your age, health, income, goals, risk tolerance, etc. There is no one-size-fits-all answer to this question. However, here are some tips and guidelines on how to compare and evaluate different universal life insurance policies and providers:

• Determine your coverage needs and budget: How much death benefit do you need to protect your family? How much premium can you afford to pay? How long do you need the coverage for? These questions will help you narrow down your options and find a policy that suits your needs and budget.
• Compare the features and benefits of different types of policies: What are the advantages and disadvantages of guaranteed universal life, indexed universal life, and variable universal life policies? How do they differ in terms of premium flexibility, cash value growth potential, investment options, fees and charges, etc.? These questions will help you understand the pros and cons of each type of policy and find a policy that matches your preferences and goals.
• Research the reputation and financial strength of different providers: Who are the best universal life insurance companies in the market? How long have they been in business? How are they rated by independent agencies such as A.M. Best or Standard & Poor’s? How are they reviewed by customers and experts? These questions will help you assess the credibility and reliability of different providers and find a provider that you can trust and work with.
• Consult a financial professional or an independent life insurance agent: Buying universal life insurance can be a complex and confusing process. It is advisable to seek professional advice from a qualified financial planner or an independent life insurance agent who can help you analyze your situation, compare different policies and providers, and recommend the best option for you.

Some common pitfalls and mistakes to avoid when buying universal life insurance are:

• Buying more coverage than you need or can afford: Universal life insurance is more expensive than term life insurance. If you buy more coverage than you need or can afford, you may end up paying unnecessary premiums or lapsing your policy.
• Buying universal life insurance for the wrong reasons: Universal life insurance is primarily a protection tool, not an investment tool. If you buy universal life insurance for its investment features rather than its death benefit features, you may be disappointed by its low returns or high fees.
• Buying universal life insurance without understanding how it works: Universal life insurance is a complex product that involves many variables and risks. If you buy universal life insurance without understanding how it works and how it offers flexibility and control to policyholders, you may make poor decisions or miss out on opportunities.

Conclusion

Universal life insurance is a type of permanent life insurance that offers both a death benefit and a cash value component. The cash value component can be used for various purposes, such as borrowing or withdrawing cash from it, or using it to pay policy premiums.

There are different types of universal life insurance policies, such as guaranteed universal life, indexed universal life, and variable universal life insurance. Each type of policy offers different rates and methods of growth for the cash value account. Each type of policy also offers flexibility and control over the premium payments, death benefit amount, and investment options.

Before buying a universal life insurance policy, it is important to understand how it works and how it offers flexibility and control to policyholders. It is also important to compare and evaluate different policies and providers and choose the one that best suits your needs and goals.

If you need more information or assistance on universal life insurance, please visit our website or contact us today. We are a team of experienced and independent life insurance agents who can help you find the best universal life insurance policy for you. We can also provide you with a free quote and a personalized analysis of your situation. Don’t wait, get in touch with us now and secure your financial future with universal life insurance.