How Universal Life Insurance Works

Life insurance is the best safety net that you can ever buy for your loved ones. It’s one of the only ways that you can ensure that your family has the money that they need if something tragic were to happen to you. We know that finding the best life insurance plan can be overwhelming. There are dozens and dozens of different kinds of plans that you’ll need to consider.

There are several different forms of permanent life insurance. With a permanent policy, the life insurance policy owner will typically have both life insurance coverage, as well as a way to save or invest within an underlying cash value component.

One type of permanent policy is universal life. This coverage option provides the policy holder with life insurance protection, along with fixed interest on the cash value portion of the plan. Universal life insurance has often been described as being similar to a term life insurance policy that is combined with a savings account.

Yet, this type of insurance policy offers much more flexibility than what can be found with more basic forms of permanent coverage such as whole life. With universal life insurance, should the situation of the insured change, the policy can also be altered in order to better fit the insured’s new coverage needs.

The Inner Workings of Universal Life Insurance

With a universal life insurance policy, the insured is protected with a guaranteed amount of death benefit proceeds. In addition, funds that are in the policy’s savings component are invested to provide the policy holder with cash value build up. Over time, this cash can grow on a tax deferred basis.

Universal life is set up so that the premium payments are actually more than the cost of the pure insurance expense. This excess amount of premium goes into the cash value portion of the policy.

Each month, the cash value is credited at a certain rate of interest, after which the policy is charged for the cost of insurance. The paid-in funds may also go towards paying for any additional riders that are included on the policy. Often, the interest rate offered by the life insurance company is determined based on a specific financial index.

The Flexibility of Universal Life Insurance

A universal life insurance policy will typically allow the policy holder to move funds between the insurance portion of the policy and the cash value component. In doing so, the policy holder may change – within certain stated limits – the amount of death benefit proceeds. In addition, both the amount of the premium and the date that premiums are due may also be changed by the policy holder.

The Many Advantages of Universal Life

There are numerous advantages to owning a universal life insurance policy. These can include:

  • Death Benefit – Universal life insurance policies offer a guaranteed amount of death benefit. This can help to provide the insured’s beneficiaries with the peace of mind in knowing that a set amount of funds will be available should the insured pass away. These funds can go towards paying off funeral costs and other final expenses, as well as to replace lost income of the insured.
  • Guaranteed Interest Rate – Universal life insurance also offers a guaranteed interest rate on the growth of funds in the policy’s cash value component. This rate is guaranteed to never fall below a certain level. This can provide the policy holder with the security of knowing that cash is available should it be needed.
  • Tax Deferral – As with other types of permanent life insurance, the funds within the cash value component of a universal life insurance policy are allowed to grow on a tax deferred basis. This can help these funds to accelerate at a higher level than if the growth on such funds were taxed each year.
  • Flexibility – One of the biggest advantages to owning a universal life insurance policy is the flexibility that is offered. These policies allow their owners to decide on the amount of death benefit protection that they want and need, as well as to decide upon the amount of premium they wish to pay. In addition, if the policy holder’s life insurance coverage needs change over time, a universal life insurance policy can be changed in order to adapt to the insured’s new situation.

Considerations Before Purchasing a Universal Life Insurance Policy

Prior to purchasing a universal life insurance policy, there are several things to consider, such as:

  • Policy Guarantees – Because universal life insurance typically offers certain guarantees with regard to interest rate, it is important to understand what the minimum – or floor – rate will be, as well as how long the guaranteed interest rate will be in effect.
  • Premium Payment – While the premium on a universal life insurance policy can be adjusted, the issuing insurance company will usually require that a minimum premium amount be paid on a regular basis. Therefore, it is important to understand how much premium will be due, as well as how often.
  • Cash Value Options – The universal life insurance policy that is chosen should also provide an ample variety of underlying investment options in the cash value component of the policy.
  • Fees – There may also be surrender charges or fees involved with a universal life insurance policy – at least for a certain number of years. Therefore, any surrender charges – as well as how long such charges may be in force – should also be noted.

Other Life Insurance Options

Universal life insurance policies are an excellent option for insurance coverage for your loved ones, but there are several other options that you should take note of when you’re looking to get protection. It’s important that you understand all of the different options available to you to ensure that you’re getting the best plan for you.

The most popular option for insurance coverage is a traditional term life insurance plan. These plans are purchased with a pre-determined expiration date on them, and once that date has passed, you’ll no longer have life insurance. Because these plans only offer life insurance protection for a limited time, they are going to be much more affordable than other life insurance options.

Another popular option for life insurance is to purchase a traditional whole life insurance plan. These policies are a different kind of permanent coverage. As long as you pay the monthly premiums for the life insurance plan, you’ll have insurance. These plans are a great option for anyone that doesn’t want to worry about having to reapply for life insurance in the future. Because these plans aren’t going to expire, they are going to be more expensive than other types of life insurance.

One option is to buy a no exam life insurance plan. These policies will allow you to have the life insurance coverage that your family needs, without being required to take the medical exam. This is a great option for anyone that is in very poor health or has several pre-existing conditions. There are several advantages and disadvantages to no medical exam. These plans are going to be more expensive, and you’ll be limited on how much insurance coverage that you can buy. Most life insurance companies will only allow you to purchase $250,000 worth of life insurance. For most families, this isn’t going to be enough life insurance.

Getting the most Affordable Life Insurance Plan

One of the most common reasons that people don’t buy life insurance is because they assume that it’s going to be too expensive, but in most cases, that couldn’t be further from the truth. Most applicants are surprised to see how affordable than life insurance plan is going to be. There are several ways that you can secure the lowest premiums from the insurance company and keep more money in your pockets.

Before the insurance company approves your application, they are going to require that you take a medical exam. The results of the medical exam are going to play a large part in how much you’re required to pay in fees every month for the policy protection. If you want to get lower rates, you’ll need to improve your health.

The first way that you should do that is by starting an exercise program. Exercise is a great way to lower your cholesterol, lose any extra weight, and drastically reduce your risk of being diagnosed with diabetes or cardiovascular complications. If you want to save money on your life insurance plan, it’s time to start hitting the gym. You don’t have to be a marathon runner to get lower premiums for the insurance plan.

The next thing that you should do is eliminate any tobacco that you currently use. If you’re listed as a smoker on your life insurance application, you can expect to pay much higher premiums for your insurance plan. In fact, smokers are going to pay twice as much for life insurance versus what a non-smoker is going to pay for the same amount of coverage. If you want to save money on your life insurance plan, you’ll need to kick those bad habits once and for all.

The best way to ensure that you’re getting the lowest rates is to work with an independent insurance broker. Unlike a traditional insurance agent, independent brokers work with various companies across the nation. That means that we can bring all of the lowest insurance premiums directly to you.

Every insurance company is different, and all of them are going to have different medical underwriting, which means that you could get drastically different rates depending on which company that you get the quote from. If you want to get the lowest rates, you’ll need to compare dozens of quotes before picking which one is the best for you.

Universal Life Insurance Coverage

Life insurance is one of the best investments that you could ever make for your loved ones. It’s one of the best ways to ensure that you can ensure that your loved ones have the money that they need, regardless of what happens.

We know that finding life insurance can be a long and difficult process, but it can be a long and difficult process, but it doesn’t have to be. There are several ways that you can ensure that you’re getting the best policy available, the best way is to work with one of our independent agents.

Because you never know what’s going to happen tomorrow, you shouldn’t wait any longer to get the insurance protection that your family deserves. Cal us today and our agents would be happy to get the insurance process started.

About InsuranceScored.com
About InsuranceScored.com

Susan Wright holds a BA from Michigan State University and an MBA from St. Louis University. Having over 20 years of working experience in the insurance and financial services industry, she has trained more than 10,000 financial services representatives. Susan has had licenses in real estate, insurance, and NASD Securities, and she has earned nine industry professional designations, including CLU, ChFC, RHU, REBC, CSA, CLTC, CCFC, CSS, and ADPA. Read more about her on Google+