Universal Life Insurance: Can You Cash It In?

Universal life insurance is a type of permanent life insurance that offers flexible premiums and lifelong coverage. It also has a cash value component, which can be borrowed against or withdrawn. However, the cash value is separate from the death benefit, meaning that beneficiaries will not receive the cash value in addition to the death benefit. While universal life insurance offers more flexibility than whole life insurance, it is generally more expensive than term life insurance. One of the biggest disadvantages of universal life insurance is the risk of policy lapse if the cash value becomes too low. Therefore, it is important for policyholders to carefully monitor their cash value.

Universal life insurance offers flexibility

Another advantage of universal life insurance is the ability to borrow money or withdraw funds from the policy's cash value component. This cash value accumulates over time and can be used to pay premiums or cover other expenses. However, it's important to monitor your cash value to ensure your policy remains adequately funded. If the cash value becomes too low, you may be faced with large payment requirements to maintain your coverage.

Universal life insurance also provides flexibility in terms of coverage duration. Unlike term life insurance, which only lasts for a set period, universal life insurance can provide coverage for your entire lifetime as long as you continue to pay the premiums. This makes it a suitable option for those seeking long-term coverage.

Additionally, universal life insurance offers flexibility in the type of death benefit. You can choose between a level death benefit, where the payout amount remains the same, or an increasing death benefit, where the cash value is added to the payout. The latter option results in higher premiums but can provide a more substantial benefit for your beneficiaries.

Overall, universal life insurance provides a high level of flexibility in terms of premium payments, death benefits, coverage duration, and access to cash value. However, it's important to carefully consider your options and seek expert advice before making any decisions regarding your life insurance policy.

It can be cashed in, but there may be tax consequences

Universal life insurance is a type of permanent life insurance that offers the flexibility to change your death benefit and adjust your monthly premiums. It is also referred to as cash value life insurance because it has a savings account built into it. This savings component grows over time and can be used to pay your monthly premium. Eventually, your cash value policy could build into a zero-cost policy, where all premiums can be paid from the built-up cash value.

Universal life insurance can be cashed in, but there may be tax consequences. When you cash in your policy, you will receive the cash value, minus any surrender charges. However, there may be federal income taxes and surrender fees charged by the insurance company. Surrender fees will be a percentage of the cash value of the policy and will decline every year you own the policy. For example, your policy may have a 12% surrender fee if you cash out in the first year, a 10% fee if you surrender after two or three years, and so on.

Any earnings on the cash value of the insurance policy may be taxable as income. So, if you have had $10,000 in earnings in your policy and you are in the 22% tax bracket, cashing out the policy may result in $2,200 in income taxes. Additionally, there may be a separate 10% federal tax penalty on any earnings in your policy.

It is important to note that the tax consequences of cashing out a universal life insurance policy can vary depending on the specific policy and insurance company. It is always a good idea to consult a financial advisor or tax professional before making any decisions about cashing out your policy. They can help you understand the potential tax implications and explore other options, such as a 1035 exchange, which allows you to exchange your current policy for another insurance policy tax-free.

Universal life insurance is a type of permanent life insurance

One of the key features of universal life insurance is its ability to build cash value over time. This means that a portion of the premium payments goes into a savings account that accumulates interest, which can be borrowed against or withdrawn. The interest rate on this cash value is set by the insurance company and can change frequently, although there is usually a guaranteed minimum rate. The flexibility of universal life insurance allows policyholders to adjust their premium payments, skipping or reducing payments if they have sufficient cash value built up.

Universal life insurance also offers the option to adjust the death benefit. Policyholders can decrease the death benefit if their insurance needs change over time, and some insurers may even allow for an increase in coverage, although this is less common.

It is important to note that universal life insurance requires careful monitoring of the cash value. If the cash value is insufficient to cover the cost of insurance, the policy may lapse, and large payments may be required to keep the coverage active. Additionally, the death benefit may be affected if investments underperform or if premiums are underpaid for an extended period.

Compared to whole life insurance, universal life insurance offers more flexibility in terms of premium payments and potential cash value growth. However, whole life insurance provides the stability of fixed premiums and guaranteed cash value growth, whereas universal life insurance does not guarantee returns.

It has a cash value element

Universal life insurance is a type of permanent life insurance that offers the flexibility to change your death benefit and adjust your monthly premiums. It is sometimes referred to as cash value life insurance because it has a savings account built into it. As the savings component grows, you gain more flexibility, such as the ability to change your premium amounts.

The cash value component of your policy can be used to adjust your premium payments and even to pay your monthly premium. Eventually, your cash value policy could build into a zero-cost policy, where all premiums can be paid from the built-up cash value, keeping the same payout amount (death benefit).

The cash value earns an interest rate set by the insurer, and it can change frequently, although there is usually a minimum rate that the policy can earn. If the investments underperform, your cash value can go down and your premiums could eventually go up.

Universal life policyholders may borrow against the accumulated cash value without tax implications. The interest rates on these loans are often lower than rates available for a personal loan, and they don’t require a credit check. However, unpaid loans will reduce the death benefit by the outstanding amount.

When a policyholder dies, the insurance company keeps the account's cash value. Your beneficiaries will be paid just the death benefit, as the policyholder can only use the cash value while they are alive. However, some life insurance policies allow you to increase the death benefit as you build the cash value.

Universal life insurance is more complicated than term or whole life insurance

Term life insurance is the simplest of the three. It offers coverage for a set number of years and has no cash value component. It is also the cheapest option.

Whole life insurance is often chosen for its stability and predictability. It has fixed premiums and a guaranteed death benefit, and the cash value grows at a guaranteed rate. Whole life insurance is generally the most expensive type of life insurance.

Universal life insurance, on the other hand, offers more flexibility than whole life insurance. Policyholders can adjust their premium payments and death benefits to suit their changing financial needs. The cash value in a universal life policy is typically credited with higher interest rates than whole life, but it may fluctuate over the years. Universal life insurance requires careful management to avoid lapses in coverage. It is also more complex and usually more expensive than term life insurance.

Universal life insurance has several subtypes, including guaranteed universal life insurance, indexed universal life insurance, and variable universal life insurance, each with its own unique features and risks.

Frequently asked questions