How Universal Life Insurance Works

What is Universal Life Insurance?

It's a subtype of cash value life insurance that allows policyholders a lot of flexibility and several unique benefits. Because it is cash value life insurance, the premiums you pay go into an investment portfolio that generates value over time. However, there is no chance of you losing your investments, since Universal Life Insurance guarantees an interest rate, though most times people earn more than the minimum.

The benefits of Universal Life Insurance:

• the ability to determine premium payments yourself
• adjustable death benefit
• tax-free savings
• guaranteed minimum interest rate
• tax-deferment on value growth of savings

Universal Life with each insurance provider might be a bit different, so take this information as a general guideline. Only your actual policy can define in law the terms of your life insurance.

Don't Pay Premiums for the Whole Policy!

With Universal Life Insurance, you don't have to pay premiums the whole time. Usually, you will only pay for a term of 20 to 40 years. You determine the amount of premiums you pay, and when you hit the requisite amount of cash value, you no longer have to pay premiums but are still covered for your whole life.

Even after you're done paying, your account still accumulates value.

All-around Savings Machine

Each type of cash value policy is a little bit different and targeted at helping people save in different ways. Universal Life Insurance is designed particularly for people who will be working a bit later in life. Those who would like to retire early should consider a term life insurance plan to combine with annuity or 401k. Universal Life Insurance works best for those planning to work into their 60s and even 70s, or until their policy matures and they would like to cash out.

You also get some control over how your savings are invested. The insurance company will give you options of how to invest the money, including a fixed-interest savings account and investment funds.

You Can Take Money from Your Account

At any time, you should be able to withdraw money from your policy. However, this may reduce your death benefit, so be wary.

Investments Need Not Be Lost Upon Death

With whole life insurance, your savings are normally kept by the insurer when the death benefit goes out. With Universal Life Insurance, you have the option of transferring them out.

If You Ever Can't Pay Premiums

Money in your savings goes to paying administration costs, rather than simply losing your policy. However, if savings run out, your policy is canceled.