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Universal life insurance is a type of permanent life insurance that offers flexible premiums, a cash value component, and a death benefit that can be adjusted to suit your changing needs. Universal life insurance, as opposed to term life insurance, offers protection for the duration of your life as long as the necessary payments are paid.
The main features of universal life insurance are:
- Flexible premiums: As long as you adhere to the policy's minimum and maximum payment thresholds, you can decide how much and how frequently to pay your premiums. If you have sufficient collected money, you can also use the cash value of your policy to pay your premiums.
- Cash value: The cash value account where a portion of your premium payments are placed earns interest at the going rate. A loan or withdrawal can be used to access the cash value, which grows tax-deferred, and it can be used for any purpose, including emergency expenses, retirement, or education costs. The death benefit will be reduced by any unpaid loans or withdrawals, and there may be additional taxes and fees.
- Death benefit: This is the sum of money that will be distributed to your beneficiaries upon your passing. You have the option of a level death benefit that remains constant over the course of the policy, or a rising death benefit that increases the policy's face value by its cash value. In accordance with certain restrictions and fees, you can also change the death benefit up or down to match your changing needs.
Those who desire permanent protection with flexibility and the possibility of increasing cash value may find universal life insurance to be a good choice. Before purchasing insurance, you should be aware of the dangers and expenses that are involved. Some of these include:
- Interest rate risk: Depending on the state of the market, your cash value's interest rate may change. You might be required to pay higher premiums or make additional payments to keep your insurance in force if the interest rate falls below a specific threshold.
- Cost of insurance: This is the fee that the insurance provider assesses you in exchange for giving the death benefit. As you age and your health declines, your insurance premiums may rise over time. This could lower your cash value and force you to pay higher premiums or make further payments in order to keep your coverage.
- Fees and charges: There may be a number of fees and charges related to universal life insurance plans, including administrative costs, surrender fees, loan interest, withdrawal costs, and mortality and expenditure charges. These costs could lower your cash worth and have an impact on your overall return on investment.
