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What is universal life insurance?

Universal Life InsuranceUniversal life insurance is a “cash value” life insurance policy, meaning it is a type of insurance that has a savings component in addition to its standard insurance component.

The savings portion of the policy is invested by the insurance company, and has interest returns relative to money market rates. And how is this amount determined?

Essentially, anything you pay over the regular premium and administration fees will be put into investments.

Most companies will give you a guarantee on a minimum interest rate, which means you’ll always be entitled to some funds regardless of how the investments turn out.

Of course, if the investments do incredibly well, the cash value of your policy will reflect that.

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Universal Life Insurance: Permanent Coverage

Universal life insurance is also known as a type of “permanent” life insurance (like whole life insurance) in contrast to term life insurance. With term life insurance, there is no savings portion, and the premiums increase over time (every 10 years, or 15, or 20, and so forth). With permanent life insurance, the premium is always the same as when you bought it, until you turn 100.

The death benefit of a universal life insurance policy can be transferred quickly to the beneficiary, who will not pay any taxes on the amount. If the same amount of money had been saved away in a bond or savings account or anything other than in the life insurance policy, the money would be subject to taxes, probate, and probably some waiting period. Someone can also use the proceeds from the savings portion of his or her universal life insurance policy while still alive to handle estate issues. This is also referred to as estate planning.

Universal life insurance is like whole life insurance in that both have this savings (or investing) component on top of the guaranteed death benefits (money to help pay for funeral costs, settling bills, etc). However, with whole life insurance, you will not know how much the company invests in anything, where they invest it, what the return is, how it’s invested, or even what the insurance itself costs. You may never know if it’s a good investment or not.

With universal life insurance, you will be aware of these things, and will have some investment options. You also get to choose from death benefit (the amount of money due to the beneficiary) options. The cheaper one pays the death benefit out of the cash value of the policy first; so if you’ve saved up a lot then there is less that the company has to take care of. The more expensive option pays both the amount stated in the policy as well as the accumulated savings.

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Universal Life Insurance Premiums

Premiums are very different with universal life insurance than with other types of insurance, and this is a huge and more recent turn of events. Traditionally, life insurance has been relatively inflexible in terms of benefits, premiums, and cash value. Universal life insurance offers a wide array of options, particularly for paying premiums.

For one, the policyholder gets to determine how he or she wants to pay and how much he or she pays. Each month the policyholder can pay more than the premium, less than the premium, the standard premium, or no premium at all that month. (If you choose not to pay the premium on a specific due-date, you will still be required to ultimately meet the minimum.) It’s also worth noting that if you pay just the minimum, you can still carry a universal life insurance policy, but you will not accumulate much savings.

If you ever want to change the premium for a whole life insurance policy, you may have to surrender part of the policy. This means you could end up having to withdraw the cash value of your policy, which would be taxed.

Is Universal Life Insurance for You?

This can be an incredibly helpful and useful policy to have if you have the means to consistently pay above your premium. You will need to be careful, though, that you still stay within certain bounds. If you pay too little for too long, you will not save anything. If you pay too much for too long, the policy becomes something other than a life insurance policy which means it can and will be taxed.

This type of insurance will not be the ideal type for everyone, and you will have to sit down and look over numbers with your agent. This includes double checking the amount of commission his or her office will make off of your policy, and how that may differ from what you yourself end up making to make sure you are purchasing the insurance that best meets your needs.

Universal life insurance is a way to combine your life insurance and investments. Some financial planners recommend that the two entities be kept separate and advise their clients to take term coverage. Others feel that universal life is advantageous. You will need to evaluate your own goals and habits to make that choice.

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