Get Info On Universal Life Policies
Universal life policies are valuable but complex insurance contracts that provide for a death benefit to be paid to a beneficiary in the event of the death of the insured person. Although life insurance is the primary feature of universal life policies, a secondary feature is a savings vehicle that allows money to grow tax deferred. By contributing to this type of policy, universal life carriers ensure that risk is spread across a wider range of mitigating factors.
What Is Universal Life
Universal life policies are those that feature cash value life insurance with flexible premiums and benefit amounts. Premiums are paid to the policy that funds the actual cost of the insurance, with an additional amount applied to an account that is managed by the universal life carrier.
This amount is invested according the particular practices of the carrier, and the insured is credited each month with a percentage of the earnings realized on that money. Because of this, each period the policy builds a cash value that is equivalent to the premium and interest earnings accumulated.
It is the cash value of the policy that allows for flexible premium payments. In fact, universal life policies provide a feature that allows the insured to make less than the premium payment, to make more than the payment, to make no payment at all, or to make payment of any amount the insured prefers.
This can occur as long as there is enough cash value accumulated in the policy to cover the cost of the insurance. For example, if the cost of insurance in a period is $200, and the insured elects to not make a premium payment that month, then the $200 would be deducted from the cash value of the policy.
Advantages Of A Universal Life Insurance Policy
In addition to the flexible premium, universal life policies offer a number of other benefits. One of these is the adjustable benefit amount. This can be used to reduce premiums, or to change coverage during particular events or life situations, such as changing family status or changing health conditions. Benefit amounts can also be adjusted when the total amount of the benefit is no longer needed.
Universal life policies allow the insured to borrow against the cash value of the account. Loans can be used for any purpose and have flexible repayment options. Cash can also be withdrawn from the account tax free, although loans and withdrawals both have an impact on the cash value and future value of the policy, so this must be considered carefully when contemplating a loan or cash-out.
Many universal life policies offer a rider that guarantees there will be no lapse in coverage, even if the cash value does not meet the cost of the insurance. These riders qualify the plan as a guaranteed universal life policy and have certain stipulations. Some of these requirements are consistent minimum premium payments, and limits or restrictions to loans and cash withdrawals.
Types Of Universal Life Policies
There are three types of universal life policies: fixed, flexible, and single premium. Each of these types is aptly named: a fixed universal life policy has fixed premium amounts for a fixed period of time. Flexible universal life permits flexibility in payment of premiums. Single premium universal life requires one large payment of premium to keep the policy in effect for the term of coverage.
Each of these types of universal life policies has distinct advantages to the individual, but there may also be pitfalls to be aware of. For instance, flexible payments may result in a lapse in coverage if the cash value of the account is not increased sufficiently by payment of premium and accumulation of returns.
Fixed universal life policies may revert to flexible policies or lapse in coverage if the guarantee is lost or the plan does not perform well enough to cover the cost of insurance. Single premium universal life policies may lapse in the event that the premium paid and money earned on it do not meet the cost of insurance.
Universal Life Compared To Other Insurance Types
Universal life policies are very different in features than whole or variable life policies, although in structure the contracts are similar. A whole life policy requires that a fixed payment be made for the entire life of the insured, and there is no flexibility in benefit amount. A variable life policy allows the accumulated cash value of the account to be directed to other types of investment accounts, such as stocks and bonds or index markets.
Term life policies contrast sharply with universal life policies. Term life policies provide benefits for a fixed period of time in exchange for payment of premium during the covered period. Term life benefits cease when the premium is not paid, or when the term expires. This can often lead to insurability, especially if a fatal condition developed during the term of the last covered period. It would be exceedingly difficult to become re-insured in cases such as this.
Selecting The Right Provider And Coverage
When considering universal life insurance policies, it is vital to research the history, practices, customer service ratings, and financial strength of universal life providers. Of crucial consideration should be a trustworthy carrier that can be entrusted to provide the right level of coverage, as being under insured or over insured both presents their own set of complications.
A universal life insurance policy can be greatly beneficial to nearly anyone of any age and of any family status. However, it’s not for everyone. For those seeking to have a known, constant premium, set death benefits, and coverage for life, a whole life policy may be the right option.
For those seeking similar benefits but with more flexibility in the utilization of proceeds from the account, a variable life policy will be best. But for those who need freedom and flexibility of premium payments, death benefits and coverage, universal life insurance policies provide the best combination of protection and flexibility.
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