UNIVERSAL LIFE INSURANCE: Why is it Essential?

Univer life insurance
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Anyone who intends to protect their loved ones most often buys a life insurance policy. Insurers offer tons of options within the top three most common life policies, which are term, whole, and universal life insurance. But then, if flexibility is your priority with life insurance, a universal life policy is ideal. Aside from the death benefit, you have your cash value and premium benefit with universal life insurance vs index UL or whole life policy.

Universal Life Insaurance

Universal life insurance is a policy that provides coverage or insures an individual for the rest of their life as long as they pay their premiums. It’s a form of life insurance that offers two benefits. The first is the cash value and the second is the death benefits. Upon the death of a policyholder, the death benefit of their policy will be paid to their beneficiaries. While the cash value is available to the policyholder while they are still living.

People who buy universal life insurance want to optimize their long-term coverage and are less interested in increasing cash value. They require an efficient method of providing their family with the long-term insurance protection they deserve.

Features

  • Protection for a longer period than standard term insurance.
  • The best long-term security for your money
  • The opportunity to personalize your protection up front and make changes later
  • You can withdraw money or borrow against the policy’s cash value.
  • Annual interest on the cash value
  • Flexibility with premiums and adjust the death benefit.

How Does It Work?

The first step in getting a universal life policy is to decide on the insurance company you want to buy your life policy coverage from. After this, you adjust the premium and death benefits to suit your financial capacity. Your UL insurance premiums are made up of two parts: the cost of insurance (COI) and the cash value. The cost of insurance includes payments for mortality, policy administration, and other expenses directly related to maintaining the policy in force. Additionally, it’s determined by the policyholder’s age, insurability, and insured risk amount. The second part of the premium is added to the policyholder’s cash value, which can be used to pay premiums as time goes by. 

Why Should You Consider Universal Life Insurance?

The following are some of the reasons why you should consider getting a universal life insurance policy.

#1. Premiums are lower than for permanent life insurance

Universal life provides the biggest life insurance benefit for your money. This is mostly because the death benefits and cash value growth are not guaranteed, as they are with whole life insurance.

#2. Meets Your Current and Future Financial Demands

With universal life insurance, a policyholder has the right to set up their protection style just the way they want it. They can easily make adjustments as time goes on if they decide to. If being in control of your policy and having the right to change it without having to pay a fine, sounds enticing to you, then you should go for it. It’s perfect for people with an unstable inflow of cash. For instance, you can reduce your death benefits with UL.

Index Universal Life Insurance

Everyone knows that permanent life insurance (IUL) comes with a cash value benefit, and lasts a lifetime, the index universal life insurance is not an exception to these benefits. It is one of the numerous permanent life insurance policies available in the state.

Depending on how well the index market performs, indexed universal life policies may earn credit interest in addition to the long-term death benefit coverage they provide. This means your cash value account can receive interest based on the performance of the stock market index that your insurer decides on. The insurer assigns a portion of your policy into a fixed account or the equity-indexed account.

In general, every index universal life policy has tax advantage, flexible premium payment, and the potency to grow its cash value. Depending on your insurer, there’s always an option for you to adjust your IUL insurance.

How Does Index Universal Insurance (ICL) Work?

The key difference between index universal life insurance and other life insurance policies is how cash value is built. For the index universal life insurance policy, cash value provides for growth with a predetermined grouping of several equities, otherwise known as the stock index rather than only non-equity earned rates.

The index stock is usually selected by your insurer. Also, your insurance provider ensures that every indexed account has a minimum crediting rate of 0%, otherwise known as the floor. This protects you against market-based losses. There’s also a maximum crediting rate, which limits growth (the cap). This will ensure that even when the index stock gives a low return, you’ll still get a specified return. The same applies to high yields.

The Index universal life policy also has a similar feature to universal life insurance. It allows you to alter your premium as your cash value develops, with the possibility of eventually reaching a zero-cost policy in which your cash value pays for all premiums. You can borrow and withdraw cash value from your coverage to use for whatever you want. 

Key Features of Index Universal Insurance

The index universal policy is different from the universal policy. With the latter, you’ll earn interest comparable to a money market account, but the formal depends on the performance of the index securities. The following are the key features of the index universal policy.

 #1. Guaranteed interest rate

Although the interest rate of IUL depends on the performance of the index market stock, you’ll receive an average rate. What if the index yield low returns? You’ll still get a

#2. Premium payments that can be adjusted (within limits)

Within the specified limits, you are free to adjust your IUL plans. Additionally, this wouldn’t be a problem if you have enough cash value. This is because you can simply opt to clear your premiums with it. 

#3. There’s no Fixed Interest Rate

Aside from the guaranteed interest rate in case of low returns and the cap on higher returns, there’s no fixed interest rate. According to the National Association of Insurance Commissioners (NAIC), funds in your cash value indexed account do not earn a fixed rate of interest when you purchase indexed universal life insurance. However, this doesn’t mean you’ll not receive any income for choosing the IUL. It only means your interest rate will be determined by a market index established by your insurer.

#4. Adjusting Death Benefit 

While it’s possible to increase death benefits with the index universal life policy, always remember you must go through a medical examination before you can do that. 

#5. Cash Value Withdrawal

If you option to withdraw rather than borrow from your cash value, you are free to do this too. However, it comes with a limitation- reduced death benefits. It can also lead to possible account lapse in situations in which there’s not enough cash value to keep your account afloat. 

#6. Cash Value

Your IUL automatically builds cash value. If you have an emergency and needs funding, you can borrow fund from your indexed universal policy.  Like the 401k withdrawal account, an indexed universal life insurance policy, charge a certain amount of interest. 

Index Universal VS Universal Life Insurance: Major Difference

The primary distinction between index universal and universal life insurance is that index universal life invests in an index fund, whereas universal life insurance invests in riskier assets. 

How Can I Calculate My Interest in IUL? 

IUL policies enable you to enhance your cash value by allocating some of your funds to an equity index account, such as the S&P 500 or NASDAQ. An equity index account grows based on the index of a whole market or market sector, and not just non-equity earned rates. Even with the variation in investment, the interest rate will remain variable, like other universal life insurance. Finally, the interest cap ensures you earn the average even with the variation in the market reaction.

What Happens When I Borrow My Cash Value And Didn’t Meet Payment Lapses?

Borrowing without paying back before the time elapses leads to the gain on the policy becoming subject to tax.

Generally, when someone borrows a loan and doesn’t pay it back or keeps making withdrawals, it lowers the cash values and policy benefits, as well as the term of the guarantee against lapse, which might cause the policy to expire and/or have tax implications. 

Can I Cancel My Universal Life Insurance Policy?

If you opt to cancel your insurance, you may be charged the surrender charges, especially if you didn’t reach the declining surrender charge number of years. The surrender charge can also include premium-based administrative charges, and monthly charges, including the cost of insurance.

Universal Life Policy Cash Value

A cash value is a saving technique in a life insurance policy that accumulates a cash value that can be retrieved in addition to the death payment. The cash value of an insurance contract, also known as the cash surrender value or surrender value, is the cash sum offered by the issuing life carrier to the policyholder upon the termination of the contract. It allows you to accumulate value in your insurance coverage over time. In many circumstances, the accrued cash value can be borrowed or withdrawn, or it can be used to pay policy premiums in your later years. When you make your premium payment, a part of it goes to your death benefits while the other one goes to your cash value.

For universal life insurance, the cash value increases in three ways. Then, as part of the premium set aside for it, the interest earned based on the current market or minimum interest rate, and the interest from borrowing your cash value. A universal life insurance policyholder can decide to withdraw their cash value. It doesn’t affect their death benefits however the withdrawn amount will be taxed. If a universal life insurance policyholder decides to borrow the cash value, he will have to pay it back in time too.

Is It Possible to Cash Out My Universal Life Insurance Policy?

Yes, it is. You can decide to sell off your UL policy or liquidate the cash value and cancel the contract. Unfortunately, you’ll have to pay a fee known as the surrender charge if you choose to do this. 

Universal Life Policy VS Whole Life

Anyone will have a clear understanding of universal vs whole life insurance when they are individually explained.

What is Whole Life Insurance?

Whole life insurance gives one protection for life. This simply means it’s for as long as the person lives and keeps the account active. It’s designed for individuals with long-term financial goals. But then, these people must also have the financial capacity to keep the account active. Once the person dies, their beneficiaries will get the death benefit as long as they continue to pay the premiums. 

How Does Whole Life Insurance Work?

With whole life insurance, the insurer puts a sum of your premium payments into a high-interest bank account or investment account. This simply means the whole life policy provides coverage and promotes savings. Your cash value continually increases every time you make a premium payment.  With the savings component of your policy, your cash value continues to grow with tax-deferred.

Universal Vs Whole Life Insurance: Main Difference

The following are the major difference between universal vs whole life insurance.

#1. Premiums

The universal life policy has a flexible premium payment. This means that policyholders can decide to pay higher or lower than the set amount, but vs the whole life insurance, premium payment remains fixed and must be maintained.

#2. Guarantee

The second difference between universal vs whole life insurance is that whole life insurance guarantees its premium level, its ever-increasing cash value as well as its death benefits in case of death. Cash value increase is the result of premium payments and annual dividends from investment.

Universal life insurance on the other hand brings flexibility. You can pay more or less for your policy each year. However, this leads to instability in your death benefits and cash value.  

#3. Dead Benefits

The whole life insurance guarantees the payment of its death benefits so long as the premiums payment was upheld by the policyholder. Unfortunately, universal life insurance death benefits are not guaranteed. Rather it depends on the amount contributed which can be higher or lower.

#4. Dividend

Universal life insurance is credited based on interest rates rather than dividend payouts. This leads to an underfunded account and an underfunded account leads to a high premium. On the other hand, whole life insurance receives a guaranteed dividend annually.

#5. Underfunded Account

It’s nearly impossible for whole life insurance to become underfunded. This is because of the punctual premiums payment in addition to the divided the account receives.

#6. Flexibility

In terms of flexibility, universal life insurance is more flexible to adjust vs whole life coverage. In terms of stability, the whole is more stable with its premium payment and guaranteed death payout vs universal.

Which is Better: Universal Life Insurance vs Whole Life?

While it’s true that both are types of the top three types of life insurance, the best among them depends on your objectives as a user. The best of the two solely depends on your life insurance objectives. Although you’ll always get help from financial service experts, make sure you have clear life insurance goals before deciding on any. They are always more than willing to help you walk through your options and assist you in developing a strategy that is unique to your family’s needs. However, if you are looking for permanent life coverage, the whole is perfect but if you want something flexible and not a lifetime, universal is perfect. You can use the checkpoint below to determine which is best for you.

UNIVERSAL LIFE POLICY: Definition & How it Works

CHECKPOINT/NEEDSWHOLE LIFE INSURANCEUNIVERSAL LIFE INSURANCE
A flexible premiumNoYes
Affordable permanent coverageNo Yes
A tax advantage cash valueYes Yes
Fixed PremiumYesNo
Life Time ProtectionYesYes
Access to the cash valueYesYes
Guaranteed cash value growthYesNo
Businessyield

Conclusion

When it comes to life insurance choices, it’s totally up to the policyholder, but then, insurers will always ensure that you find something that matches your financial capacity. In terms of financial capacity, the universal life policy is the most flexible option. In most cases, it’s more flexible than whole and term life insurance.

FAQs On Universal Life Insurance

How Long Does Universal Life Last?

A universal life policy will remain in force until the policyholder’s death as long as it is properly funded and premiums are paid on time.

Will my cash value be added to my death benefits upon death?

No. The cash value is only available to the policyholder. He can either withdraw it, borrow it or use it to pay his premium. But once he is dead, his beneficiary will only get the death benefits.

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