Universal life insurance is another one of several products that help an individual’s family after the individual dies. Each universal life insurance policy can be tailored to the needs of each individual to make sure it meets their needs.
Universal life insurance was created as a flexible alternative to whole life insurance in the 1980s. Both types of policies have a savings component that allows for tax deferred cash. Generally the insurance company will take 4% – 5% of your premium and invest it in several ways.
Although the owner of the policy has no say in how the premium will be invested, the usual methods are through bonds, money markets or mortgages. There are usually two options for the way that a death benefit will be paid. Option A pays it thorough the cash value of the policy. As you build cash value the company will lower your premiums.
Option B pays cash value as it accumulates over the years and pays the face amount that was originally stated in the contract. This option will cost the individual a little more than Option A.
A universal life insurance policy can also be beneficial when there is a need for a long term death benefit protection. All major life insurance companies have some form of universal life insurance and they may have more than a few options. Some credit unions or banks may also have similar policies.
When you are exploring these policies it is a good idea to know the pros and cons:
- It is flexible and the individual can change the death benefit as the needs change for the family.
- The individual can pay smaller or larger premiums as their financial circumstances change.
- Currently death benefits are tax free and no income tax is paid on the growth of the cash value.
- If the premiums are small over a long period of time the policy may lapse leaving the individual without coverage.
- If the investments are poorly made by the insurance company interest returns for the cash value will decrease.
- The individual may have to pay higher premiums because of these bad investments.
A universal life insurance policy is important because it provides for those unexpected situations that no one can predict. Some people use this type of policy for estate planning and it can be an integral part of a strong financial plan.