Universal Life Insurance
A more complex yet flexible Life insurance that may be incorporated into your wealth planning strategy
Universal Life Insurance
Universal Life insurance, often called UL insurance, is a type of Permanent Life insurance that combines a death benefit with a cash value component. Unlike Term Life insurance, which provides coverage for a specific period, Universal Life insurance is designed to last your entire lifetime as long as you continue paying the required premiums.
Unlike the Whole Life policy, UL offers flexible payments and may allow to increase or decrease the death benefits amounts. Since the Universal Life policy builds cash value, it may allow you to skip some of your payments if you have sufficient cash value built into the policy.
Two Major Components Of UL
Think of UL insurance as a financial instrument built with two major components:
1. Death Benefit: Like all life insurance policies, Universal Life insurance provides a death benefit to the beneficiaries upon your passing. This benefit is paid out tax-free and can help your loved ones cover funeral expenses, outstanding debts, estate taxes, and other financial obligations.
You can ask the insurance company to raise your death benefit amount in UL insurance. Typically, insurance underwriters will ask for an additional medical examination. If the results of this test are deemed satisfactory, the insurance company might agree to the higher coverage amount without requiring you to apply for a separate insurance policy.
2. Tax-Free Bank Account, which accumulates cash value- your money grows in value similar to a long-term retirement account. You can take out loans against your own money if needed, and you may not be required to pay back if you don’t want to refill your cash value back to what it was. Many people often leave the cash account alone and continue contributing with their regular payments allowing their money to grow, treating this account as a retirement account.
Other Key Features Of Universal Life
- Flexibility in Premium Payments: Universal life insurance offers flexibility in premium payments. You can choose to pay more than the minimum premium, which would help build up the cash value faster and potentially cover future premiums. Additionally, you may be able to adjust the timing and amount of your premium payments within certain limits.
- Adjustable Death Benefit: Universal Life insurance policies often allow you to adjust the death benefit within certain limits. This can be useful if your financial situation changes and you want to increase or decrease the coverage.
- Investment Options: Some universal life insurance policies offer investment options within the cash value component. This allows you to potentially earn higher returns based on the performance of the underlying investments. However, with this potential for higher returns comes an element of risk, as poor investment performance could impact the growth of your cash value.
- Tax Advantages: The cash value growth within a Universal Life insurance policy accumulates on a tax-deferred basis. This means you will not be taxed on the gain until you withdraw or borrow against it. Additionally, policy loans or withdrawals from the cash value are often tax-free up to the amount of premiums paid, making them a source of potential tax-free income.
- Lapse Risk: Universal life insurance policies require ongoing premium payments to maintain the coverage and keep the policy in force. If the cash value is insufficient to cover the cost of insurance charges and administrative fees, the policy could lapse. Monitoring the policy’s performance and ensuring that the cash value remains adequate is crucial to prevent this.
In summary, Universal Life insurance offers a combination of lifelong coverage, a cash value component, and flexibility in premium payments. While it provides potential benefits like tax advantages and investment options, it also comes with complexities and risks that require careful consideration.
Please get in touch with us to review UL’s features, costs, and potential returns and see if it aligns with your financial goals and needs.