Universal Life Insurance Policies
- Last Updated: Monday, 01 March 2021
Also known as group universal life and group variable life, universal life insurance, is a policy that allows the holder to change the amount of coverage as the need for insurance changes. These policies also provide the owner with the opportunity to accumulate a tax-deferred cash value too.
Benefits of Universal Life
As is the case with whole life insurance, the benefits of universal life go well beyond those of a term policy. For example, universal life provides the policyholder with the option of funding a tax-deferred accumulation account; other benefits include:
- Additional Flexibility: it’s possible to adjust the amount of coverage as the need for life insurance changes.
- Tax-Free Benefits: the proceeds from life insurance are generally not taxable under current law.
- Tax Sheltered Growth: allows the policyholder to place money into a tax-sheltered account where the money can grow on a tax-deferred basis.
Selecting a Universal Life Policy
The life insurance industry has worked hard to structure a variety of policies to suit an assortment of individual needs and interests. Those that are struggling with the decision between term, whole life, and universal life insurance should consider the following:
- Is there a spouse or child that depends on you for financial support?
- Does your spouse have adequate life insurance coverage? Universal life policies often allow the policyholder to add a spouse or a child to an existing policy.
- Do you have significant debt that your family would be responsible for if you were no longer around?
- Do you have a savings goal that a tax-deferred account could help meet?
- Will the need for life insurance vary over time?
These last two questions are important, because as we will see, one of the primary features of universal life is its tax-deferred cash balance.
Tax Deferred Cash Account
A universal life plan offers benefits beyond those of term insurance, including a tax-deferred cash balance. For some, term life may be enough, but for others, the benefits of this type of account are important. For example, the following list contains some of the more common uses of the cash balance fund:
- Continuing Coverage: it’s possible to continue life insurance coverage by paying the insurance premiums using the balance in the tax-deferred account.
- Elect to Own Paid up Coverage: this money can be used to lock in a fixed amount of paid-up insurance coverage. With this option, the policyholder may never have to pay another premium again.
- Establish an Annuity: once there are sufficient funds in the account (let’s say $20,000 or more), it’s possible to receive regular payments in the form of an annuity.
- Surrender Value: anytime the policyholder decides they no longer need universal life insurance coverage; they can receive the total value of their tax-deferred account.
Finally, under certain conditions it may be possible to borrow money from this account. Check with the terms and conditions of the policy, but interest expense and earnings on contributions back to the fund are usually tax-deferred.
Universal Life versus Universal Variable Life
It’s important to understand that not all policies are alike. This rule holds especially true when going beyond term insurance. Also keep in mind these policies can be offered as individual coverage, or many times as group coverage through an employer. With that as a backdrop, we’ll finish up with a brief summary of the differences between two separate, and distinct, types of policies offered today: universal life and universal variable life.
Universal Life Policies
These are generalizations, but also good indications of what to expect with a group universal life plan or simply a universal life policy:
- Tax-deferred cash fund contributions will earn a fixed interest rate that is usually guaranteed by the insurance carrier or underwriter.
- These policies offer low risk, with a safety of principal.
- There are usually no expenses or fees.
- The policyholder has the flexibility to decide how much they want to contribute.
Universal Variable Life Policies
The primary difference between universal life and universal variable life is the variable policies allow the owner to earn a rate of return beyond a fixed rate. The following is a list of additional benefits universal variable life has to offer:
- Contributions can usually be allocated to a fixed account, variable account, or both.
- The potential to earn higher returns on contributions allocated to the variable account.
- The ability to select a level of risk and reward based on the policyholder’s risk tolerance.
- Management and / or administrative fees may apply.
- Minimum investment contributions may apply.
Most insurance companies will allow customers to take what is termed a free-look period; usually around 45 days or less. During the free-look period, it’s possible to cancel coverage without incurring a penalty.
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