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Universal Life Insurance
Universal life insurance is a type of permanent life insurance that provides coverage for your entire life while offering the flexibility to adjust your premiums and death benefit over time. It's an attractive option for individuals who want life insurance coverage and investment opportunities with potential for long-term growth.
Features of Universal Life Insurance
Lifelong Coverage
Universal life insurance provides lifelong coverage as long as premiums are paid. This is in contrast to term life insurance, which provides coverage for a specific period, typically 10, 20, or 30 years. If you're looking for lifelong protection, universal life insurance may be a better option.
Flexibility
Universal life insurance offers flexibility in terms of premiums and death benefits. You can adjust the premiums and death benefit amount to meet your changing financial needs. For example, if you experience a significant life event, such as the birth of a child or a change in income, you can adjust your premiums and death benefit accordingly.
Tax Benefits
The cash value of a universal life insurance policy grows tax-deferred. This means you won't pay taxes on the interest or investment gains until you withdraw the money. Additionally, the death benefit is typically tax-free for the beneficiary.
Estate Planning
Universal life insurance can be an effective tool for estate planning. The policy's death benefit can be used to pay estate taxes, which can be significant and threaten the financial security of your loved ones. Additionally, the policy's cash value can be used to fund a trust or provide for your family's financial security after your death.
Legacy Planning
Universal life insurance can also be used as a tool for legacy planning. You can name a charity or other organization as the policy's beneficiary, ensuring that your legacy lives on after your death.
Types of Universal Life Insurance
There are two types of universal life insurance premiums: yearly renewable term (YRT) and level.
- Yearly renewable term premiums are based on the policyholder’s age and increase each year as the policyholder gets older. The death benefit remains the same throughout the policy’s lifetime, but the premium amount increases each year. YRT premiums are typically lower at the policy’s inception but can become more expensive as the policyholder ages.
- Level premiums, on the other hand, remain the same throughout the policy’s lifetime, providing the policyholder with better budgeting and planning capabilities. The premium amount is typically higher than the YRT premiums at the policy’s inception but remains level throughout the policy’s lifetime, regardless of the policyholder’s age. The death benefit also remains the same throughout the policy’s lifetime.
Cash value component
The savings or investment component of universal life insurance is known as the policy’s cash value. The policyholder’s premium payments fund the cash value, which earns interest and grows over time. The policyholder can access the cash value through loans or withdrawals during their lifetime, providing a source of supplemental income or a way to meet financial needs.
When a policyholder pays extra premiums, it increases the policy’s cash value, which can result in higher potential growth. The cash value earns interest or returns based on the insurance company’s investment performance. The extra premiums paid can also help to offset future premium payments or fund the policy’s death benefit.
Why to choose universal life insurance?
- One significant advantage of universal life insurance is the flexibility it offers. Policyholders can adjust their premiums and death benefits as their financial situation changes, providing more control over their policy.
- Additionally, universal life insurance policies typically have a cash value component that grows over time, allowing policyholders to borrow against the policy or use it to pay the premiums.
- Another advantage of universal life insurance is the potential for investment opportunities. The cash value component can be invested in various options, such as bonds, stocks, or money market funds, allowing for potential long-term growth.
