This Explanation of Universal Life Insurance will provide you a better understanding of this type of life insurance. Universal life insurance was developed in the late 1970s to overcome some of the disadvantages associated with term and whole life insurance. As with other types of life insurance, you pay regular premiums to your insurance company, in exchange for which the insurance company will pay a specific benefit to your beneficiaries upon your death.As with whole life insurance, a portion of each payment goes to the insurance company to pay for the pure cost of insurance. The remainder is invested in the company’s general investment portfolio, with the potential to build cash value.
Most universal life policies pay a minimum guaranteed rate of return. Any returns above the guaranteed minimum vary with the performance of the insurance company’s portfolio. The policyholder has no control over how these funds are invested; funds are managed by the insurance company’s professional portfolio managers.
However, universal life policies are very flexible. As the policy owner, you can vary the frequency and amount of premium payments and also increase or decrease the amount of the insurance to suit changes in your situation.
For example, if your financial situation improves significantly, you can increase your premiums and build up the cash value more rapidly. On the other hand, if you find yourself under a financial strain, you can reduce your premiums, or you may even be able to deduct premium payments from the cash value of the policy. Of course, changing the premium or withdrawing part of the cash value in your policy will affect the rate at which your cash value accumulates. It may also reduce the size of the death benefit.
Any cash you withdraw from your universal life policy is considered “basis-first.” You won’t incur a tax liability until your withdrawals exceed the premiums you’ve paid into the policy. Any amount that exceeds the premiums will be taxed as ordinary income.
It is possible to structure many universal life policies so that the invested cash value will eventually cover the premiums. You would then have full life insurance coverage without having to pay any additional premiums, as long as the cash-value account balance remains sufficient to pay for the pure cost of insurance and any other expenses and charges.
The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. There are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications.
If you who want the flexibility to change their premiums or death benefits, a universal life insurance policy may be your best choice. You can receive a free universal life insurance quote by filling out the short form above. A licensed insurance agent will contact you to help you with the process of purchasing a universal life policy.
Explanation of Universal Life Insurance - A Quick Summary
1. You decide (up to limits regulated by federal tax law) when and how much premium to pay. The minimum premium is based on insurance company expenses, premium taxes, and the cost of pure insurance for your policy.
2. As you pay your premium, the insurance company deducts its sales expenses and premium taxes.
3. The remainder of your premium is credited to your cash value account. Each month, the company charges this account for its other expenses and the cost of pure insurance (net amount of risk coverage), or mortality cost.
4. Your cash value earns interest at a rate that fluctuates based on the rates earned by a segregated portfolio within the insurance company's general account. A minimum (guaranteed) interest rate will be stated in your policy.
5. If the company's portfolio earns more than the guaranteed interest rate, the company credits the excess interest to your policy.
6. If your remaining cash value is not sufficient to cover expenses and the cost of pure insurance, and you do not pay in more premium, the policy amount may then have to be reduced, or your policy will lapse.
7. You may take a policy loan in an amount not to exceed the policy's cash surrender value less the annual loan interest. Repayment replenishes your cash value; any loan balance outstanding (plus interest due) at your death is deducted from the policy amount paid to your beneficiary.
