Universal life insurance is a type of permanent life insurance that provides both a death benefit and a savings component. It offers more flexibility than whole life insurance by allowing policyholders to adjust their premiums and death benefits over time. Here, we’ll explain how the best universal life insurance works and the benefits it provides, helping you make an informed decision when considering this type of policy.
How universal life insurance works:
Universal life insurance combines life coverage with a cash value component that grows over time. A portion of your premium goes toward the death benefit, while the other portion is invested in a cash value account. This cash value grows based on interest rates set by the insurance company, and policyholders can access it through loans or withdrawals, although these could reduce the death benefit.
One of the main advantages of universal life insurance is its flexibility. You can adjust the premiums and death benefit amounts based on changes in your financial situation. This makes it suitable for people who need coverage that can evolve with their needs over time.
Premium flexibility:
Unlike whole life insurance, which requires fixed premium payments, universal life insurance allows policyholders to vary their premiums within certain limits. You can choose to pay more than the minimum required to increase your cash value, or pay less if you’re experiencing financial difficulties. This flexibility makes it an appealing option for those with fluctuating income or changing financial needs.
However, it’s important to remember that failing to pay the required minimum premiums can result in your policy lapsing. To keep the policy in force, you need to ensure that the cash value is sufficient to cover the cost of insurance.
Cash value growth:
The cash value in a universal life insurance policy grows at a variable interest rate, which is determined by the insurer. The interest rate is usually lower than what you would earn with investments, but it provides a guaranteed minimum rate of return. Over time, the cash value can accumulate, and you can borrow against it or withdraw funds if needed. However, any withdrawals or loans from the cash value can reduce the death benefit or create a tax liability if not repaid.
Death benefit flexibility:
Another unique feature of universal life insurance is the ability to adjust the death benefit. You can increase or decrease the death benefit as needed, provided you meet the necessary requirements. This can be useful if your financial obligations change, such as paying off a mortgage or supporting children through education.
