Universal Life insurance is a type of Permanent Life insurance policy. It is related to Whole Life insurance in that it has a “cash value.” Like Whole Life insurance, a portion of your monthly premium is invested into a tax-deferred annuity. However, unlike Whole Life, where the investment is placed into a savings account at a fixed interest rate by the insurance company, in Universal Life the money is put into more aggressive types of investments similar to money market funds. Interest rates may vary, but never drop below a minimum, which is usually around 4%.
These type of policies are typically more flexible than Whole Life insurance policies.
As with any kind of life insurance the purpose of Universal Life (UL) insurance is to protect your family. As mentioned above, it is a type of permanent life insurance. Much like a Whole Life insurance policy, Universal Life insurance has cash value that accrues in tax-deferred savings over time. The policies have a greater degree of flexibility than traditional Whole Life policies.
With a Universal Life insurance policy you have the ability to adjust the premiums and the benefit amount over the term of the policy. The premium amounts and death benefits are fixed with Whole Life. Unlike with Whole Life, where a portion of your monthly premium is placed in a single tax-deferred annuity account with a fixed interest rate at the time of the purchase of the policy, the savings portion of your premium in a UL policy is placed in a variety of bonds, mortgages and money market funds by the insurance company. Interest rates may vary, but never drop below a minimum, which is usually around 4%.
The flexibility of Universal Life offers cost saving opportunities for the life insurance buyer. For example you may choose two different types of death benefits in a UL policy. You can elect for the death benefit to only pay out what has been accumulated in the cash value of the policy, which costs less than electing a fixed death benefit plus the cash value.
One note about Universal Life - you can decide on your premium amount to fit your financial circumstances – but if you pay too low of an amount for too long, the policy could lapse, leaving your family unprotected. Always check with your insurance agent before lowering your premium.
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