Overview of Universal Life Insurance
Universal life is an adaptable form of permanent life insurance that permits adjustments to the premium and death benefit, which impacts the policy’s cash value. Universal life is a type of insurance that combines the pure insurance features of term life with the savings account features of whole life. This article will review the pros and cons of universal life insurance.
Adjustable Universal Life Premiums
One of the best things about universal life insurance is that you can choose when and how much to pay in premiums, as long as you pay at least the minimum amount needed to keep the policy active and don’t pay more than what the IRS says you can pay in excess premiums. Once your policy has enough cash value and you’ve made your first regular payment, you can change how much you pay for your premium. But this freedom of choice also has some downsides. Let’s discuss the pros and cons of changing how you pay your premiums for universal life insurance.
Pros: Universal life is different from other types of permanent life insurance because it can change to meet your financial needs when your income goes up or down. You may be able to:
- Pay higher premiums more often than required
- Pay lower premiums less often or even skip payments
- Pay the premiums out of your pocket or with the cash value.
Cons: Skipping payments, paying only the minimum premium, or paying less than the target premium will affect the policy’s cash value.
- Keep the policy from building cash value. Paying the minimum premium only covers the cost of the policy; it doesn’t give you any extra money to put toward building cash value.
- Slow down or lower the policy’s cash value growth. The insurance company sets a “target” premium that it thinks is enough to cover the cost of coverage while also building cash value. If you pay less than the target, less money will go into the policy’s cash value. The cash value is used to pay for your insurance when you don’t make a payment. If you do this more than once, the cash value will decrease.
- Let the policy expire, and only use the cash value to pay for the loss. The premium will eventually use up all the cash value in the policy, at which point the policy may expire, and your coverage may end.
Assessing the cash value
A part of your premium payments and the variable interest rate at which the policy grows add up to cash value in a universal life policy. So, more money goes toward the policy’s cash value when you pay more premiums. In addition, if the interest rate on the policy grows faster than expected, the cash value builds up faster. But there are pros and cons to getting your policy’s cash value.
Pros: You must qualify for a bank loan based on your credit score. A life insurance policy loan does not require you to qualify. All policies that generate monetary value operate in the same manner. You are also not required to repay the loan. Another advantage is that you usually do not have to pay income tax on the loan. You can partially withdraw if you want to obtain money from your insurance without giving it up or canceling it. The majority of partial cash withdrawals are tax-free.
Cons: You can only borrow up to the policy’s cash value. And the money you borrow is not derived from your cash worth; instead, it is derived from the insurance company, with your cash value serving as collateral. Even if you don’t have to pay it back, the loan is not free money. You must pay interest on a loan. If you fail to pay at least the interest, the interest will compound, and your cash value will decrease. This could result in the lapse of your coverage. Assume you do not repay the loan before passing. In that instance, the loan amount plus interest will be deducted from your beneficiary’s death benefit.
With an adjustable life insurance policy, you can change the death benefit amount by lowering or raising the amount. Depending on your situation, this could be a good thing or a bad thing.
Decreasing the Death Benefit of a Universal Life Policy
Pros: You can lower your death benefit whenever it fits your life and financial needs. For example, suppose the main reason for your death benefit was to replace your income while your children were young. In that case, you could choose to lower the death benefit once they are old enough to work. In the same way, reducing the policy’s death benefit can be helpful because it usually means paying less in premiums, which can be beneficial if, for example, you have less money coming in.
Cons: If you lower the death benefit, your beneficiary will get less money when you die than you planned when you bought the policy. Even though you might need to reduce the amount, the catch is that if you died and your family had a lot of financial needs, the payout from the policy might not be enough to support your family when they need it the most.
Increasing the Death Benefit of a Universal Life Policy
Pros: When you die, your beneficiary will get more money if the death benefit is bigger. If your family had more money, they could live for a longer time or pay off bigger debts.
Cons: To increase your death benefit, you must take a medical exam and go through the insurance company’s underwriting process again. This is likely to make your premiums go up because the face value of the policy will go up.
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I grew up in Dubuque, Iowa, where I learned the concepts of hard work and the value of a dollar. I spent years in Boy Scouts and achieved the honor of Eagle Scout. I graduated from Iowa State University and moved to Chicago and spent a few years managing restaurants. I then started working in financial services and insurance helping families prepare for the high cost of college for their children. After spending years in the insurance industry, I moved to Arizona and started working with Federal Employees offing education and options on their benefits. I became a Financial Advisor / Fiduciary to further help people properly plan for the future. I enjoy cooking and traveling in my free time.
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