Universal life insurance combines the benefits of life insurance coverage with the potential rewards of an investment fund. Compared to traditional whole life insurance policies, universal life insurance provides a larger rate of return on the cash value or the investment portion of the life policy.
A flexible type of policy, universal life insurance allows the consumer to choose the monetary value of the premium to be paid to the insurance company. The insurance company then credits the value of the premium, minus fees, to the cash value or to the investment portion of the life insurance policy.
Insurance companies deduct administrative costs on a monthly basis from a policyholder’s universal life account. After those deductions, the remaining premium is invested in guaranteed term deposits, bond funds, index funds, equity funds, or a combination of these investments. In many cases, the policyholder may choose their preferred mix of investments. Additionally, some insurance companies offer a guaranteed minimum interest rate on your investments.
In some cases, policyholders may actually withdraw a portion of the balance from the account without resorting to a loan. However, it is important to remember that the administrative charges and initial insurance costs may cause the cash value in an account to grow slowly over the first 5 to 10 years, sharing a similar fee structure to a whole life policy.
With regard to taxes, often the earnings on the cash value portion of your life insurance policy are sheltered until cash is taken out of the account. To go one step further, if you do not draw from the cash value portion of your life policy at all, your survivors will not have to pay any tax on this money.
Quarterly account statements permit you to see how much insurance protection you have accumulated, how much ‘cash value’ you have accumulated, how much money is being paid on the investment portion of the policy, and, of course, how much money is being paid towards administrative costs.
Universal life policyholders can select their preferred death benefit from two options. Survivors can either receive the face value of the policy, and not the accumulated cash value, or beneficiaries can receive the face value of the insurance plus the accumulated cash value. The latter of the two options results in more expensive insurance premiums over the course of the policy. However, some companies permit policyholders to adjust the level of insurance coverage, as family and financial responsibilities shift through life.
Overall, if you are looking for an extremely flexible type of life insurance that also offers an investment option, universal life insurance may be suitable for your needs.