What Is Universal Life Insurance?
A variation of whole life insurance, universal life policies offer permanent insurance protection. Like whole policies, universal builds cash value over time on a tax-deferred basis. Unlike whole life, these plans gives policyholders the ability to adjust their death benefit and premiums as their needs change over time. This flexibility is what most distinguishes this protection from whole life coverage.
The Basics
Also known as flexible premium adjustable life insurance, universal coverage came about in the early eighties as an alternative to whole coverage. With whole, a portion of the policyholder’s premiums are invested by the insurer in funds, bonds, and mortgages. The return earned on these investments is then applied to the plan on a tax-deferred basis. Typically, these policies have a minimum guaranteed interest rate that gives consumers a certain amount of money regardless of how the insurer’s investments perform. These cash value credits allow the consumer to decide, within reason, how much of a premium he/she would like to pay each month. If the premiums are not large enough to cover the costs of the coverage, the difference is withdrawn from the cash value.
Death Benefit Options
These plans also allow the individual to change his/her death benefit, within certain limits, throughout the course of the plan. Typically, these plans offer two death benefit options. The first option uses the policy’s cash value to pay the death benefit. In the second option, the insurer pays the death benefit according to the face value of the plan in addition to any cash value the policy accumulated over time. The latter option tends to have higher premiums associated with it.
Pros and Cons to Consider
On the plus side, universal options offer consumers unparalleled flexibility. Policyholders can change their death benefit as their coverage needs evolve, and they can adjust their premiums to accommodate income fluctuations. In this way, it is ideal for families who have inconsistent incomes. On the down side, if an individual pays minimal premiums for too long, the plan may lapse. In other words, the customer would be without insurance protection if this happened. Additionally, if the investments of the issuing provider perform badly, the cash value of the plan will not accrue as quickly as it should, thus forcing the policyholder to pay higher premiums.
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