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Universal life insurance

Universal life insurance

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A permanent life insurance offering flexible premiums and the potential to build cash value.

Taking out a life insurance policy is a big step in your financial planning. But before you apply for a policy, you’ll need to know the type of coverage you’d like to put in place — specifically, whether you’re looking for permanent or term life insurance.

Universal life is a flexible permanent option with living benefits that include the potential to earn cash value. And you can borrow against that cash value, often tax-free.

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    What is universal life insurance?

    Universal life insurance is a form of permanent life insurance that offers flexible premiums and a death benefit with the opportunity to build cash value.

    Unlike with term life insurance, there’s no set policy term. As long as you continue to pay your premiums, universal life insurance lasts a lifetime.

    While both are considered permanent policies, universal life insurance also differs from whole life. Both offer opportunities to build cash value, but whole life comes with fixed premiums, while premiums for universal life are flexible.

    How does it work?

    1. Universal life insurance is designed to provide a tax-free death benefit for your loved ones after you die.
    2. You pay your insurance premiums monthly or annually. These premiums may fluctuate over time, with some policies allowing you to decrease and skip payments. As long as you continue to pay your premiums, your policy remains active over your lifetime.
    3. Each time you pay your premium, a small portion of your payment is placed in an account that builds cash value over time. The cash value of your policy builds interest, much like a savings account.
    4. The accumulated cash value of your policy may eventually cover the cost of your premiums.

    Who can benefit from universal life insurance?

    Universal life insurance is a good choice if you’re interested in a permanent policy, like whole life insurance, but are looking to use your policy’s cash value to cover premiums later in life. Whole life insurance doesn’t offer this option.

    Universal life insurance isn’t without its drawbacks. For instance, it tends to be more expensive than term insurance, and the cost of your premiums may rise as you age. You’ll also need to monitor the cash value available in your policy, which may be difficult if you don’t have experience with investment accounts.

    Benefits and drawbacks of universal life insurance

    Pros

    • Permanent coverage. Your policy remains active as long as you pay your premiums.
    • Cash value potential. A portion of your premium goes into a savings-type account.
    • Deferred taxes. Your cash value investment and death benefit won’t incur taxes.
    • Flexible premiums. Adjust how much you pay into your policy as your finances require.

    Cons

    • Can be costly. You’ll likely pay more for universal than you will for term life.
    • Requires monitoring. You’ll need to make sure your cash value doesn’t dip too low, or you could lose your coverage.
    • Not the best way to save. Interest rates are reset often and tend to be conservative.

    Traditional universal life insurance vs. indexed universal life insurance

    Indexed universal life insurance (IUL) differs from traditional universal life insurance (UL) in one significant way: IUL allows you to tie your policy’s cash value to a market index, like the S&P 500 or the Nasdaq 100.

    The market index you attach your policy’s cash value to is often capped, which limits how much you can earn with IUL. If the S&P index is capped at 4%, it means your IUL cash value can earn up to 4% of what the S&P index earns only.

    Traditional life insurance (UL)Indexed universal life insurance (IUL)
    PermanentYesYes
    Builds cash valueYesYes
    Policy options — death benefit and premiumsFlexibleFlexible
    Cash value ratesFixed by providerTied to market index
    Potential for investment growthConservative, stableAssertive, fluctuating

    Alternatives to universal life

    If you’re interested in permanent life insurance, consider whole life insurance. It offers similar benefits, like lifelong protection and the potential to build cash value. And while it offers the stability of fixed premiums, it lacks the flexibility to adjust your death benefit later on in the life of your policy.

    For a cheaper alternative, take a look at term life insurance. It offers life insurance for a specified term of 5, 10, 15, 20, 25, 30 or 35 years, depending on the insurer, though without the ability to build cash value. After the term expires, so does your policy.

    Bottom line

    Universal life insurance is a permanent life insurance policy that offers you the flexibility of adjusting your death benefits alongside the potential to build cash value.

    But it can be expensive, and you’ll need to stay on top of your policy’s available cash value to avoid losing your coverage.

    With so much competition for your life insurance dollar, it pays to explore your options. Learn more about life insurance, and compare providers to find the best fit for your family’s needs.

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