Universal life insurance is a kind of permanent life insurance. Like whole life insurance, it offers both insurance and savings components.
Those features take into the realm of an investment opportunity as well as lifelong security for your family or business both before and after your death. You should research your options carefully as each type has its pros and cons.
Defining Permanent Life Insurance
We’ll begin by describing permanent life insurance.
This type of insurance provides coverage throughout your life. It differs from a term life insurance which remains in effect for a set period of time. Term life insurance is basically just a death benefit which is paid to your beneficiaries after your demise. Permanent life insurance includes more features which increase its overall value.
Permanent life insurance includes a saving piece in addition to coverage.
It is more expensive than term life insurance, per thousand, regardless of the type. The price differences are significant, depending on your coverage.
However, it doesn’t mean it’s not money well spent. Rather, your premium funds both the insurance and the saving parts of your policy.
The differences between the two involve how interest is earned and the kinds of changes you can make in your policy during its duration. In any case, life insurance is a long-term product. Thus, your current situation and your anticipated future are important considerations whether you choose term or permanent life insurance.
Cash Value Insurance
The key difference between term and permanent life insurance is the cash value portion. A part of the money you pay in goes toward investments by your insurance company. These monies will earn interest you can collect free of federal income tax.
In many ways, this insurance is not unlike setting aside money in an IRA. The difference is in how the funds are handled.
Whole and universal life are two kinds of permanent life insurance. You can use the cash value of either one to take out loans against it. These types of insurance allow you to get the financial benefits during your lifetime. You can also make withdrawals. While you don’t have to pay them back, they will subtract from your ultimate death benefit so they aren’t entirely risk-free.
So, What Is Universal Life Insurance?
To put universal life insurance in context, we’ll begin with a summary of whole life insurance.
On the surface, the two are closely aligned. They both have the insurance and saving portions. With whole life insurance, you pay a set premium. A part of it funds the savings portion which guarantees you a cash value. You may earn more money through dividends to pay your premiums.
Universal life insurance differs on several significant points.
First, the hallmark of this insurance is more flexibility. These features kick in once you’ve made your first premium payment. Then, you’re in charge. You can change your death benefit to meet the changing needs of your family. You can also exercise flexibility when it comes to premiums both in amount and frequency.
There are several tax advantages of permanent life insurance which apply to universal life, too. Its death benefit is generally tax-free, but may be subject to state or local tax laws. You can accumulate funds with its cash value which are tax-deferred. There are also other benefits specific to universal life insurance.
Advantages of Universal Life Insurance
As you can see, its flexibility is one of its most attractive features, subject, of course, to policy restrictions. You’ll still need enough money to cover the insurance costs and fees. And this is another area where flexibility comes into play.
You can also use the policy’s cash value to pay your premiums so you can realize its value too. It benefits you and your beneficiaries.
Your cash value earns interest based on a minimum rate. You know what to expect from your universal life insurance policy upfront. You may also earn additional interest if it exceeds the minimum interest rate. It’s one reason universal life insurance is also known as adjustable life insurance.
As you may expect, it has both good and bad points.
Disadvantages of Universal Life Insurance
While it has a lot going for it, you should also be aware of the caveats associated with universal life insurance.
While you may earn more interest during the good times, you’ll also find your cash value may stagnant during the leaner ones. It’s a smart idea, therefore, to get this type of insurance while you’re younger so the cash value can grow should you need it down the road.
While loans are a nice perk, you should keep your borrowing in check to maintain its value and cover insurance cost. Also, you may pay taxes or fees on withdrawals. You should take the time to learn about the conditions of loans and withdrawals so you know the true costs.
Remember, its flexibility also adds to its complexity.
What to Consider Before Purchasing Universal Insurance
Life insurance is your way of safeguarding your family’s financial future. It can serve many purposes including income replacement for your spouse and as a college fund for your children. It works best if it’s a good match for your and your current situation.
To determine if universal life insurance is right for you, consider the present and future needs of you and your family.
If you’re just starting out, universal life insurance offers an excellent means to accommodate the changes in your life, but may be more costly than a simple term policy. Whether your family is still growing or your business is just starting out, universal life insurance can adapt to what you need it to be, but term is the simplest, most affordable if you just want basic coverage.
Though, it offers a practical way to deal with changes in your financial situation with little risk to you. It gives what is known as a living benefit.
For example, you can increase your death benefit if your family grows. You can also increase it to cover a long-term business debt.
If your situation changes, you can adjust your policy to better serve your need.
Estimating Your Needs
Likewise, you can decrease your death benefit as your other investments increase in value. Remember, life insurance is only one part of your estate planning.
To ensure an adequate replacement income for your family, consider all the contributing factors to the future household income determine the role life insurance must fulfill.
To estimate the amount of coverage you’ll need for universal life insurance, begin with an approximate annual income you want to guarantee your spouse. Take this figure and multiply it by 10 to determine what you’ll need to provide to see to your spouse’s needs in their lifetime. Also, consider present income as well as other investments you may have.
Now, term should be a majority of this, but if you see a need for insurance longer than what term offers, cover only this portion with a universal policy, and the remainder with term. This will save you thousands in the long run.
Universal life insurance offers different ways to approach the question of the death benefit. You can set a fixed amount you may adjust as your financial situation evolves. You can also opt for an increasing death benefit which includes the policy’s cash value. It’s another way you can make the flexibility of the insurance work for you.
Universal life insurance offers another option for permanent life insurance giving you the flexibility to adapt to the changing conditions of your financial situation. With the opportunity to take out loans, you also have the chance to support your growing business or deal with a financial setback.
It’s a safe choice for a secure future for you and your family.