The Real Truth about Universal Life
In essence a universal life policy is a forced savings account coupled with pure insurance. The monthly premium is credited to the account and the cost of the insurance is then debited from the account. The ability for the cash value in the policy to increase over time based on interest and principle allows for the insurance portion of the policy to be paid for. As the age of the insured increases, so does the risk of the insurance company. A proportionate amount of increased premium is debited from the cash value of the policy to pay for the higher risk insurance.
The idea is to allow the cash value in the account to increase faster than the increase in premium cost. This will allow for either reduced premiums as the cash value grows or for premiums to become unnecessary after a fixed period of time. In the case of a single premium universal life policy, there is a one-time premium payment at the inception of the policy. The policy remains in effect until either the insured dies or the cash value of the policy is depleted by the cost of insurance.
Universal life policies should not be looked at primarily as investments vehicles, in fact it is against the law to do so. This is done primarily because of the tax advantages inherent to universal life policies. With a universal life policy, you can borrow against the cash value without incurring tax penalties. There are other tax advantages to universal life policies.
Benefits
Universal life policies have many benefits and can fit a number of needs for estate and financial planning. Some of these needs are obvious, like final expenses and income for dependents. Others are not so obvious, like a company paying for a policy on a CEO. This is a form of a bonus for the CEO, the company can write off the premium as a cost of business and the CEO only need pay income tax on the premium amount.
Companies also use universal life polices as a non-qualified deferred compensation package for personnel. This allows the company to pay for the policy and hold all rights to the cash value, then upon the retirement of the insured pays benefits to them. In the case of the death of the insured the company pays the benefits to the insured’s beneficiaries.
Universal life policies can be used to protect assets from frivolous litigation (in some states) or as collateral to guarantee a loan against the death of the insured/borrower.
Cautions
It is possible for a policy to lapse if payments are not continued on a regular basis. Some policies offer a no lapse guarantee; make sure you understand what is actually guaranteed before making your choice. A withdrawal or loan against the cash value in the policy can also affect the death benefit or possibly cause the policy to lapse, even if there is a no lapse guarantee.
Universal life policies are a great tool in the toolbox for financial planning if used correctly. They are flexible, dependable, and readily available.
For more information from Steven on how to buy life insurance and annuities, visit our Annuities site. Or if your looking for life insurance quotes you can visit our insurance site! Feel free to check out our Insurance blog too!
The idea is to allow the cash value in the account to increase faster than the increase in premium cost. This will allow for either reduced premiums as the cash value grows or for premiums to become unnecessary after a fixed period of time. In the case of a single premium universal life policy, there is a one-time premium payment at the inception of the policy. The policy remains in effect until either the insured dies or the cash value of the policy is depleted by the cost of insurance.
Universal life policies should not be looked at primarily as investments vehicles, in fact it is against the law to do so. This is done primarily because of the tax advantages inherent to universal life policies. With a universal life policy, you can borrow against the cash value without incurring tax penalties. There are other tax advantages to universal life policies.
Benefits
Universal life policies have many benefits and can fit a number of needs for estate and financial planning. Some of these needs are obvious, like final expenses and income for dependents. Others are not so obvious, like a company paying for a policy on a CEO. This is a form of a bonus for the CEO, the company can write off the premium as a cost of business and the CEO only need pay income tax on the premium amount.
Companies also use universal life polices as a non-qualified deferred compensation package for personnel. This allows the company to pay for the policy and hold all rights to the cash value, then upon the retirement of the insured pays benefits to them. In the case of the death of the insured the company pays the benefits to the insured’s beneficiaries.
Universal life policies can be used to protect assets from frivolous litigation (in some states) or as collateral to guarantee a loan against the death of the insured/borrower.
Cautions
It is possible for a policy to lapse if payments are not continued on a regular basis. Some policies offer a no lapse guarantee; make sure you understand what is actually guaranteed before making your choice. A withdrawal or loan against the cash value in the policy can also affect the death benefit or possibly cause the policy to lapse, even if there is a no lapse guarantee.
Universal life policies are a great tool in the toolbox for financial planning if used correctly. They are flexible, dependable, and readily available.
For more information from Steven on how to buy life insurance and annuities, visit our Annuities site. Or if your looking for life insurance quotes you can visit our insurance site! Feel free to check out our Insurance blog too!