Universal Life Insurance: Savings Or Security?

Universal life insurance is a type of permanent life insurance that offers flexible premiums and death benefits. It also has a savings element, allowing policyholders to build cash value over time. This cash value can be invested and can grow through interest, providing an additional source of savings. However, it is important to monitor the cash value as underfunding can lead to large payments or policy lapse. Universal life insurance offers more flexibility than whole life insurance but has fewer guarantees.

Universal life insurance offers flexible premium payments

The ability to adjust premium payments gives you control over your policy and enables you to align it with your changing needs and circumstances. For example, if you are experiencing lean times, you can lower your premium payments to ease the financial burden. On the other hand, if you want to build up your policy's cash value faster, you can choose to pay more during certain periods. This flexibility sets universal life insurance apart from other permanent life insurance policies, such as whole life insurance, which typically has fixed premiums.

It is important to note that while universal life insurance offers flexibility in premium payments, it also requires active monitoring of your policy. If you don't pay attention to your cash value, your policy may become underfunded, leading to the risk of large payment requirements or even policy lapse. Therefore, it is advisable to consult a financial expert or a fee-based life insurance advisor before making significant changes to your premium payments.

Universal life insurance offers a savings component

The cash value is guaranteed to grow at a minimum annual interest rate but may grow faster depending on the company's market performance. The interest rate is set by the insurer and can change frequently, although there is usually a minimum rate that the policy can earn. The cash value can be used as surrender value, loan collateral, or to pay premiums.

Universal life insurance policies can be a good option for those who want permanent coverage with lower premiums. The flexibility of universal life insurance allows policyholders to adjust their premium payments up and down as their financial situation changes. However, it is important to monitor the cash value account to ensure that the policy does not lapse or premiums do not increase if the cash value account gets drained.

Universal life insurance offers flexible death benefits

There are two types of death benefits to choose from: a level death benefit or an increasing death benefit. A level death benefit means that the death benefit amount remains the same throughout the life of the policy. For example, if you have $100,000 of coverage and build up $60,000 of cash value, your beneficiaries will receive $100,000 when you die. With an increasing death benefit, your cash value balance is added to the death benefit. So, in the previous example, your beneficiaries would receive $160,000: the death benefit plus the cash value. This option comes with higher premiums.

It is important to note that the death benefit of a universal life policy is less flexible than the premium payments. While you can typically decrease the death benefit, you may not be able to increase it without a guaranteed insurability rider. This means that a new policy with a higher death benefit would need to be issued.

Universal life insurance also offers flexible premium payments. You can pay more or less than the minimum premium, and the additional funds will be added to the cash value of the policy. Alternatively, if there is enough cash value, you may be able to lower or skip payments without the policy lapsing. However, if your cash value falls to zero and your premiums do not cover the cost of insurance, your policy may lapse. Therefore, it is important to monitor your cash value and ensure that you are paying enough to cover the cost of insurance.

Universal life insurance policies can be surrendered for a cash value

Universal life insurance is a type of permanent life insurance that offers flexible premiums, a savings component, and a death benefit. It allows the policyholder to build cash value over time, which can be accessed in several ways. One option is to surrender the policy, which means cancelling it and receiving its surrender value, which is the cash value minus any surrender fees.

The surrender value of a universal life insurance policy is the actual amount of money the policyholder will receive if they withdraw all of the cash value. While the cash value is the sum of money that grows in the policy, the surrender value may be lower due to surrender fees and other charges. Surrender fees are typically charged if the policy is surrendered before a specified period, usually 10 to 15 years, and they can significantly reduce the amount of money received.

It is important to note that surrendering a universal life insurance policy has implications. Firstly, the coverage ends, and the policy is cancelled. Secondly, the beneficiaries will not receive a death benefit when the policyholder dies. Finally, there may be tax implications on the amount received above the cost basis, which is the amount paid in premiums.

When considering surrendering a universal life insurance policy, it is essential to weigh the pros and cons. On the one hand, surrendering the policy can provide a lump sum of cash, which may be useful for a large expense or investment opportunity. On the other hand, the loss of coverage and the potential tax implications should be carefully considered. Additionally, there are alternative options to access cash value, such as withdrawing funds or borrowing against the policy, which may be more suitable in certain circumstances.

Universal life insurance policies have tax benefits

Universal life insurance is a type of permanent life insurance that offers a savings element, flexible premiums, and a death benefit. While the cash value of universal life insurance policies grows tax-free, there are some instances where taxes may be owed. Here are the key tax benefits of universal life insurance policies:

Tax-Free Death Benefits

Death benefits paid to beneficiaries are generally free of federal income tax. This means that the transfer of a large lump sum to beneficiaries upon the death of the insured occurs without any tax implications, providing valuable financial support to families and dependents.

Tax-Free Growth

The growth within the cash value account of a universal life insurance policy is tax-free. Any growth in the cash value, as well as the commensurate growth in the eventual death benefit, is not subject to taxation. This allows the cash value to accumulate over time without being eroded by taxes.

Tax-Free Loans

Loans taken against the cash value of a universal life insurance policy are also free of federal income tax. There are no age restrictions on this benefit, and the borrowed funds can be used for any purpose, such as paying college expenses, financing a car, or investing in a home. The policyholder can choose to repay the loan or allow the insurance company to deduct the balance from the death benefit.

Tax-Free Exchanges

Under IRC Section 1035, policyholders can exchange their universal life insurance policy for an annuity without incurring income tax. This provision offers flexibility to those who may no longer need life insurance but anticipate a need for income in the future.

Estate Tax Benefits

Life insurance contracts are typically considered part of an individual's taxable estate. However, by transferring the insurance policy to someone else at least three years before their death, the policy can be excluded from the estate, thereby increasing the amount that can be bequeathed to heirs.

While universal life insurance offers these significant tax advantages, it is important to note that there are limits to the amount that can be contributed to the policy before it becomes a 'modified endowment contract', which may result in the loss of some tax benefits. Consulting a tax advisor or insurance professional can help maximize the tax advantages without triggering this provision.

Frequently asked questions