Universal life insurance is a type 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.
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.
It is more expensive than term life insurance, per thousand, regardless of the type. The price differences are significant, depending on your coverage. 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.
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 is the one reason universal life insurance is also known as adjustable life insurance.
Perhaps another advantage is its uniqueness in utility for things like pension maximization plans, estate planning, and even charitable giving where the benefit is guaranteed and permanent. As you may expect, it has both good and bad points.
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 young 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.
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.
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.