Are you in the process of purchasing life insurance to protect your loved ones?
Are you confused in determining which type of policy is right for your needs?
Well, you have come to the right place! Once you complete Universal Life Insurance 101: What You Need to Know, you will be confident in your knowledge about universal life.
Universal Life Insurance 101: What You Need to Know
The first step is to figure out whether you want a temporary or permanent life insurance policy.
A temporary policy (also known as term) will only cover you for a limited number of years, for example, 10, 20 or 30 years. A permanent policy will cover you for your entire lifetime.
If you prefer a temporary policy, then universal life is not for you!
What Is Permanent Life Insurance?
Universal life is a permanent insurance policy, which means you will be covered for life as long as you continue to pay your premiums.
What Is Universal Life Insurance?
It is a permanent life insurance policy that has a combination of a death benefit with a savings component that is commonly referred to as the cash value. The savings portion will be invested with interest, so you will be able to build up a cash value.
What Is Cash Value?
When you make your premium payment, the portion which exceeds the current cost of insurance is applied to the cash value in the policy and will be earning interest.
A universal life policy will allow you access the accumulated cash value through withdrawals and loans. These withdrawals are exempt from federal income tax.
When you take out a loan, you will be charged a cash surrender fee. It can be as high as 10%. The loan must be paid back with interest of course, typically 5-9%.
If you borrow against the cash value and pass away before paying off the loan, then your beneficiaries will receive the death benefit minus any outstanding loans against the policy.
Sadly, if you were to pass away and you had accumulated cash value in your policy, the insurance company gets to keep the money. Unfortunately, your beneficiaries will not be the recipient of any accumulated cash value upon your passing.
What Is Surrender Value?
After a policy has been issued for generally 3 years and you wish to cancel the policy, you can use the surrender value option to access the accrued cash value.
If you opt for the surrender value, please note that the insurance company may charge termination fees for the policy and thus will reduce the overall cash payment to you. Only use the surrender value option if you have an additional life insurance policy elsewhere.
What makes a universal life insurance policy unique is that it offers flexibility to make adjustments to the death benefit and premiums. For example, maybe in your younger years when you have a growing family, you would like to have a higher death benefit. Whereas in your later years when your children are adults, you have the option to decrease the death benefit.
You also have the choice of having flexibility with your premiums. You can choose to have the same premium amount year after year. Or you can decide to change your premium payments based on your potential income level during certain years.
For example, you decided to pay a lower premium during the next couple of years because you will be obtaining an advanced degree. Once your graduate, you know that your income will increase because of a job promotion and at that time you will be increasing your premium payments.
What Are The Downsides
- The premiums are more expensive than a term life policy. If cost is a major factor, a term life policy will be better suited for you.
- A universal life policy has the potential to lapse. Meaning that the insurance policy is no longer in effect and a death benefit will not be paid out.
If you have stopped making your premium payments or the payments are not enough to cover the cost of insurance, then the insurance company will use your accumulated cash value to make the premium payments.
Once the cash value is depleted because of the lack of premium payments, then the policy will have the potential to lapse So make sure that your insurance premiums are paid up. Otherwise, it may lapse.
- The cost of insurance for the policy will increase as you age. Don't get into the trap thinking that the accumulated cash value will suffice in paying the increasing costs later down the road.
Especially for people on a fixed income in their later years, fast rising insurance rates can quickly wipe out all that accumulated cash value which took years to grow.
Once the cash value is depleted, you will need to pay more money into the policy to keep it funded. Otherwise, the policy will lapse and you will no longer have coverage.
You probably heard of horror stories from friends in which their cash value portion of their universal life policy wasn't earning enough interest to pay for the rising cost of insurance. This is why it is so important to have an agent properly design your policy, so it does not have the risk of being underfunded.
What Happens Next?
Hopefully, this post Universal Life Insurance 101 has provided you with the confidence in understanding this popular policy. Your next step as an educated life insurance shopper is to get life insurance quotes.
The number one reason to buy life insurance is to protect your loved ones from financial distress.
At TDL Insurance Group you can use our free life insurance quoter to get a variety of quotes.
Simply call us at 800-876-9016 for a customized quote. We will take the time to understand your goals and research which companies will give you the best rates and the best chance to qualify.
If you prefer, just send an email to email@example.com and I'll be happy to give you a customized quote.