Universal Life Insurance
The purchase of life insurance can be done for many different reasons. For some, it is to replace income, and for others it is to pay off debt. Still others have the need for paying off excessive estate taxes so that loved ones do not need to sell off family heirlooms and other assets in order to come up with the amount that will be owed to Uncle Sam.
In any case, when buying life insurance coverage, it is important to have a good understanding of both the amount and the type of protection that is being purchased. This is because there can be a difference in the way that the policy performs, as well as possibly even pays out.
Types of Life Insurance Coverage
In today’s life insurance marketplace, there are two main forms of coverage that are available. These are term and permanent. Term life insurance is considered to be the most basic type of life insurance policy. This is because term life coverage consists of death benefit protection only, with no corresponding cash value or investment component.
In many cases, because term life provides only a death benefit, this type of coverage is usually cheaper than a comparable permanent life insurance plan. However, term life, as its name suggests, will only provide coverage for a certain amount of time, such as 5, 10, 15, 20, or 30 years. Once that time period has elapsed, the insured will typically need to obtain another policy, or – if allowed – convert his or her policy over to a permanent form of life insurance coverage.
Permanent life insurance offers both death benefit protection and cash value. These policies will typically also last throughout the remainder of the policy holder’s life – provided that the premium is paid.
With a permanent life insurance policy, there are also some nice tax incentives. For example, the cash that is growing in the cash value component is allowed to do so tax-deferred. This means that the growth of these funds will not be taxed until the time that it is withdrawn – and, over many years, this could essentially allow these funds to grow to a substantial amount.
Policyholders are allowed to either borrow or withdraw the funds that are in the cash value portion of their policies. And, while these funds are not required to be paid back, if there is an unpaid cash value balance in the policy at the time of the death of the insured, then this amount will be subtracted from the death benefit that is paid out to the beneficiary.
Types of Permanent Life Insurance Coverage
There are several different types of permanent life insurance coverage. The most basic form of permanent life insurance is whole life. As its name suggests, this form of coverage is intended to remain in force through the insured’s entire life.
This coverage can be attractive to policyholders because the premium is usually locked in throughout the entire life of the policy. Therefore, the policyholder does not need to worry about regular premium increases over time. The face amount of coverage on a whole life insurance policy will also usually stay the same over time. And, provided that the premium is paid, these policies cannot be cancelled.
Some whole life insurance policies will offer dividends to the policyholder. These are considered to be a return of a portion of the policy’s premium, and therefore, they are not taxed as income to the policyholder. The policies that receive dividends are referred to as participating policies.
A type of policy that is similar to whole life insurance, yet offers much more flexibility is universal life insurance. These policies have often been described as providing a low-cost death benefit along with a cash value component.
The flexibility comes in that the policyholder is allowed to change – within certain guidelines – the death benefit, as well as the timing and the amount of the policy’s premium payment. Whenever a premium payment has been made, the insurer will deduct a certain amount of that premium for the cost of the death benefit. It will also take another portion of that premium and place it towards the cash value of the policy.
In deciding how much of the premium will go towards the cash value and the death benefit, a universal life insurance policyholder will oftentimes be able actually to move funds between the two sections of the policy.
There are several types of universal life insurance plans that are offered in the marketplace today. These include the following:
- Interest Sensitive Universal Life Insurance – This type of universal life is another name for a traditional universal life insurance policy.
- Variable Universal Life Insurance – A variable universal life insurance policy will be somewhat similar to the traditional universal life insurance policy. However, in this particular case, the policyholder will be allowed to invest the cash value portion of the policy into different investments. Here, there will be no guaranteed minimum cash value.
- Equity Indexed Universal Life Insurance – This type of policy will have its cash value performance linked to a certain market index. Because of that, the account value of equity indexed universal life insurance policy will go up and down based upon the market movements of the underlying index that is being tracked. There are much equity indexed universal life policies that may offer a guarantee that the value of the cash value component won’t fall below a certain amount, such as zero if the underlying index falls dramatically. This can provide the policyholder with principal protection – and peace of mind. Conversely, many of the policies will also place a “cap” on the amount of upward movement, or growth, that can occur in the cash component as well. What this means is that even if the underlying index performs quite well, the value of the cash value component cannot rise above the stated cap.
There are many nice advantages that can be gained by owning a universal life insurance policy – including the fact that their holders have a great deal of flexibility regarding when and how much premium they pay (provided that there is enough cash in the cash value component to cover the cost of the policy’s death benefit).
Also, depending on how the interest rate in the cash value component will be credited, the rate of return on a universal life insurance policy is oftentimes higher than it is on a comparable whole life insurance plan. Also, cash value in a universal life insurance policy is often easier to access.
What is Indexed Universal Life Insurance?
Over the past several years, a newer form of universal life insurance has been used for life insurance protection, as well as a good supplement for retirement income planning needs. This is indexed universal life insurance.
The funds that are allocated into an indexed universal life (or IUL) policy allows an individual to direct the premium into one or more underlying index options such as the S&P 500 index. Should the index have an up year, growth could be substantial. If the index has a decline, the policyholder is protected from loss and typically receives only a zero interest crediting to his or her account. This can oftentimes provide those who are saving for retirement with a win-win scenario because essentially, the funds that are in the account are never really at risk.
Because policyholders are allowed to borrow funds from their plan without a tax penalty, many are doing so and using the funds to supplement their retirement income. Likewise, funds may also be used to pay off debts or other obligations.
Using these funds as a retirement income supplement can offer a substantial benefit over other accounts such as an IRA (Individual Retirement Account) or a 401(k) plan. This is because these types of plans do not offer similar tax-related benefits.
Indexed universal life insurance policies have become popular with those who are middle-aged and are approaching retirement. This is because these individuals can deposit a substantial amount of premium dollars into these accounts to build up a large cash value while they are still in their working years.
Although the policy will still maintain a death benefit, the policyholder is able to utilize the accumulation of the cash value for items that they may need prior to reaching their retirement – such as paying for a child’s college, paying off their mortgage, or even taking a nice vacation.
Even if the policyholder takes out a large loan against the policy’s cash value and then pays it back later in full, the entire amount of the death benefit will be restored. If the cash value loan or withdrawal is not repaid, this amount will then be deducted from the amount of death benefit that is paid out to the beneficiary at the time of the death of the insured.
Finding the Right Universal Life Insurance Policy
If you determine that a universal life insurance policy is the right type of coverage for you, there are several factors that you will want to keep in mind as you search for your policy. First, you will want to make sure that you have the right type of universal life insurance plan. Remember, there are several forms that this type of coverage can take – and some can be riskier that others regarding how and where the cash value is invested – so be sure that you have a good understanding of how the cash will be credited prior to moving forward.
Also, you will need to ensure that the insurance company you are purchasing from is strong and stable in terms of paying out its claims to policyholders. There are many life insurance companies out there in the marketplace – and they all tend to offer something of appeal to certain customers. Therefore, it is important to be sure that the insurer you purchase from is rated highly by the insurer rating agencies such as A.M. Best, Standard & Poor’s, Moody’s, Fitch, and TheStreet.com.
How and Where to Obtain Premium Quotes for Universal Life Insurance Coverage
For those who were seeking premium quotes on universal life insurance coverage, there is a strategy for getting the best coverage at the most beneficial premium price. This entails working with either an agency or a company that has access to more than just one single insurer.
In doing so, you will be much better equipped for comparing multiple insurance policies, benefits, and premium quotes – in a more unbiased manner – and then making a determination regarding which one will be the best for you, your situation, and your insurance budget.
When you are ready to start the process of comparing which universal life insurance plan is right for you, we are here to help. We work closely with many life insurance carriers in the marketplace today, and we can assist you in attaining all of the pertinent details that you will require for making a more informed purchase decision. When you are ready to move forward, all that is necessary is for you to use the form on this page.
Should you discover that you have any additional questions regarding universal life insurance coverage – or questions about insurance in general – please feel free to contact our experts to talk live. We can be reached via phone, toll-free, by dialing 877-235-9299.
We fully understand that the purchase of life insurance coverage can sometimes seem confusing. There are many variables to keep up with – and you want to be sure that you are making the right choice in terms of coverage type and amount. But rest assured that you have an ally on your side. Contact us today – we’re here for you.