How universal life insurance works
We love a life insurance policy that comes with lots of options, and you’ll have plenty of them with a flexible universal life insurance policy.
A universal life insurance policy is for people who want maximum control over their life insurance policy as it accumulates cash value over time. You’ll also have flexible premiums, flexible death benefits, and access to your policy’s cash value later in life.
Here’s what you get with flexible universal life insurance
Universal life insurance is a type of permanent life insurance with savings and flexible premium options. You’ll have coverage for as long as the policy is active, and you can always decide how much you pay and put aside for savings.
Universal life insurance premiums include two things: the cost of insurance amount and a savings component. To keep your policy active, you’ll have to meet the cost of insurance amount, which is usually not high compared to other types of policies. The cost of insurance will be used to cover the cost it takes to ensure you and any other fees.
Flexible premiums are a unique feature of universal life insurance policies. If you choose to pay additional premiums, that money will be saved to grow your account’s cash value through investments. This money will earn tax-deferred interest and any profits from investing. Interest rates will fluctuate based on market conditions.
It’s usually wise to pay more than the minimum cost of insurance early on to grow your policy’s cash value. That’s because your insurance premium will go up as you get older. However, as you age, universal life insurance policies allow you to pay your rising insurance premiums using the accumulated savings in your account without running the risk that your policy will lapse.
When you pass away, your beneficiaries will only receive the death benefit that the policyholder sets, and the insurance company will retain any of your policy’s remaining cash value. Some universal life insurance providers allow you to increase your death benefit if you pass a medical exam.
How borrowing against your universal life insurance policy works
Aside from using your policy’s cash value to cover your higher insurance premiums later in life, you can also borrow money from the account to cover any expenses that arise.
When your policy’s cash value grows, you can access a portion of the value in the form of a loan without affecting the death benefits your beneficiaries will receive. Remember that you grow the cash value by making premium payments that are more than the minimum cost of insurance.
However, you may have to pay taxes, fees, and interest on any money you borrow from your accumulated cash value. If you do not repay the loan before you pass away, the death benefit will be reduced to make up for the borrowed amount and the remaining interest will be deducted from your policy’s remaining cash value. You also need to be careful that you don’t borrow too much money and leave your account balance too low to cover your rising insurance costs. If your investments did not perform as expected, or your premiums go up more than you had anticipated, your policy may lapse.
