What Is Universal Life Insurance?

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Universal life insurance is a type of permanent life insurance that provides lifelong protection as long as the premiums are paid. A portion of each premium payment goes towards paying for the death benefit, while another portion goes towards building up the policy’s cash value. The cash value of the policy can be withdrawn or borrowed against after it has accumulated over time. However, this may reduce the death benefit, create a tax implication, or cause the policy to lapse. The cash value also earns interest that is in line with current money market rates, but the interest rate may fluctuate along with the market. Some companies offer a minimum performance guarantee on the policy to protect against this.

The flexibility of universal life insurance also allows for the adjustment of premiums and death benefits over time. The death benefit can be increased as long as the policyholder passes a medical exam, while the death benefit can be reduced to reduce the cost of the policy. The premiums on a universal life policy are flexible and can be lowered or stopped for a certain amount of time if the cash value can cover the costs. However, negative consequences may occur, such as the policy ending if the account’s cash value is used up to pay for premiums.

Whole Life Insurance Universal Life Insurance
Lifelong Protection Yes Yes
Cash Value Yes (increases at a predetermined schedule) Yes
Interest on Cash Value N/A In line with current money market rates
Premiums Fixed Flexible
Death Benefit Fixed Flexible

It’s important to maintain a positive cash value on a universal life policy to avoid the policy lapsing, meaning no more coverage. The insurance provider may offer a grace period to restore the policy to a positive cash value. Universal life insurance may be a suitable option for those who want to build tax-deferred savings and do not expect to tap into the funds for a long time. It’s recommended to talk with an insurance provider to understand the options available and choose a policy that is suitable for personal situations and long-term goals.

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