Choosing the best life insurance policy for your needs depends on factors such as whether you want to invest a portion of your premium and who relies on your income. A type of permanent life insurance policy, universal life insurance offers more flexibility, though may be more complicated than other types of policies.
What Is a Universal Life Insurance Policy?
Universal life insurance is a type of permanent life insurance coverage, offering both a death benefit and a cash value component. Your policy will remain in effect as long as you pay your premiums or remain alive. There are three types of coverage: indexed universal life, variable universal life, and guaranteed universal life.
Policyholders have a certain level of flexibility compared to other types of permanent life insurance policies in that you can lower your premium payments or change your death benefit amount. Plus, the cash value component offers more potential to earn more interest – on the flip side, the value can go down over time.
More specifically, the cash value component earns interest based on a money market rate of interest, or for some types of universal policies, a rate that’s tied to a market index. Whatever you earn will increase your cash value, helping you pay your premium. Lowering your monthly payments can be useful if your financial situation changes.
Keep in mind that doing so will eat up your cash value – if there isn’t enough you will need to make up the difference or else your policy will lapse.
What Is Indexed Universal Life Insurance?
Indexed universal life insurance (IUL) allows you to earn interest that’s tied to the performance of index funds such as the S&P 500, though your insurer may limit your rate of return. Or, you may be able to choose to earn all or part of your cash value in a fixed-rate account.
What Is Variable Universal Life Insurance?
Variable universal life insurance (VUL) lets policyholders choose how to invest the cash value portion of their policy. Options include stocks, bonds, and mutual funds – you can also choose to invest in multiple accounts.
What Is Guaranteed Universal Life Insurance?
Guaranteed universal life insurance (GUL) is also called no-lapse guaranteed universal life insurance, this type of policy offers a guaranteed death benefit and premiums that stay the same for the life of the policy. Though often included under the permanent life insurance umbrella, GUL policies usually have an end date that's selected at the time of purchase. Policyholders typically choose an advanced age – 95, 102, etc. – and the policy will remain active until that point. Unlike other permanent life policies, a GUL policy may have little or no cash value.
How Does Universal Life Insurance Work?
As you keep paying your premiums on your universal life insurance policy, you’ll experience cash value growth over time. Depending on the insurer and the policy you ultimately go with, you may need to pay one upfront premium payment or a fixed monthly premium.
As long as the money in your cash value remains in your policy, your funds will continue to experience income-tax-free growth, though the accumulated cash value could go down, depending on the type of universal policy, if your investments underperform. However, once you withdraw money, you will have to pay taxes and your death benefit can decrease. If you decide to terminate your policy, you can keep most or all of your accumulated cash value.
One exception is if you were to borrow against your cash value. The loan amount isn’t taxable if you pay back the full amount while your policy is still active. If the amount you borrow (including interest) exceeds the cash value, your policy might lapse.
When you pass away and your policy is still active, your beneficiaries will only receive the death benefit – the insurance company keeps any funds in excess of this amount. Beneficiaries typically receive a single tax-free payment, or monthly or annual installments. Some insurers offer annuities as an additional option – these are contracts where the insurer agrees to pay the beneficiary a one-time payment or periodic payments for a predetermined amount of time.
Compare Term, Whole, and Universal Life Insurance
Universal Life vs. Whole Life Insurance
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Both universal and whole life are permanent life insurance policies, offering both a death benefit and cash value component. While either type of life insurance can help you use your policy as an investment vehicle, the main difference lies in the way the cash value grows over time.
A whole life policy offers a guaranteed fixed interest rate, and your premium amount is the same. Plus, your death benefit amount is guaranteed. For all of these reasons, whole life premiums are usually more expensive than universal life policies.
Universal life, on the other hand, doesn’t guarantee returns on your cash value because the interest rate fluctuates depending on the type of investment chosen by your insurer. If your investments underperform, your accumulated cash value will go down, which could result in higher premiums. Of course, your investments in your universal life insurance policy could fare well, potentially better than what whole life insurance can provide, resulting in lower premiums.
Either policy allows you to borrow against your cash value or surrender your policy. Doing so will decrease your death benefit paid out to your beneficiaries.
Author: Sarah Li Cain
Source: © 2022 U.S. News & World Report L.P.
Retrieved from: USNews.com
FINRA Compliance Reviewed by Red Oak: 2202958
Indexed Universal Life Insurance is an insurance contract that, depending on the contract, may offer a guaranteed annual interest rate and some participation growth, if any, of a stock market index. Such contracts have substantial variation in terms, costs of guarantees and features and may cap participation or returns in significant ways. Any guarantees offered are backed by the financial strength of the insurance company, not an outside entity. Investors are cautioned to carefully review an indexed universal life insurance for its features, costs, risks, and how the variables are calculated.
Please consider the investment objectives, risks, charges, expenses, and your need for death-benefit coverage carefully before investing. The prospectus, which contains this and other information about the variable life policy and the underlying investment options, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
The investment return and principal value of the variable life policy are not guaranteed. Variable life sub-accounts fluctuate with changes in market conditions. The principal may be worth more or less than the original amount invested when the policy is surrendered. Any guarantees offered are backed by the financial strength of the insurance company.