How Universal Life Insurance Works

If you are realizing that your current investment strategy isn’t fully diverse. And you’re looking to solidify that portfolio with a stable product that provides interest growth and cash value, look no further than Universal Life Insurance.

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.

universal life insuranceYet, 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 – Just like most permanent life insurance policies, any cash growth inside the plan will grow tax deferred. This is an added benefit to you because it accelerates at a higher level than if the growth of 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.

Should you Buy a Universal Life Insurance Policy?

When you’re looking for life insurance, one of the first decisions you need to make is which kind of policy you should buy. When you’re looking at a universal life insurance plan, it can be a confusing process.

Universal life insurance plans are a popular option for anyone who is looking for a flexible life insurance policy. Policyholders have the ability to change their premiums and their coverage amount based on their needs.

If you are looking for cheap life insurance, then universal life insurance is not going to be your best choice. Because of the flexibly and added benefits, it’s going to cost significantly more than a simple term insurance policy. If you’ve looked at the advantages and weight them against the cost of a universal life insurance, but you’ve decided this plan doesn’t work for you, don’t worry. There are still plenty of other options for insurance coverage you can choose from. Keep reading and we will look at other popular choices.

Indexed Universal Life Insurance

One of the newest types of life insurance – and most flexible – is indexed universal life. This type of policy is thought by some to offer the “best of both worlds” in that it provides death benefit protection, along with some nice savings and investment features as well.

Perhaps your first question is this; will I qualify for life insurance?  Keep in mind that there are companies who offer life insurance without an exam or term life insurance with pre-existing conditions, so don’t let anything stop you from getting the coverage you deserve.

How Does Indexed Universal Life Insurance (IUL) Work?

indexed universal lifeIndexed universal life insurance works in a similar fashion to a regular universal life insurance policy in that it provides a death benefit component and a cash value component. Within the cash value component, the funds will grow, based on an underlying index, such as the S&P 500 or NASDAQ 100.

There are some parameters that are set within the cash portion of an indexed universal life insurance plan, whereby the policyholder can only earn a maximum amount of interest per year. This, however, is offset by the fact that they are also guaranteed a minimum amount of return, or “floor,” as well.

For example, an indexed universal life insurance policy will set a cap rate. This means that the interest that is earned in the cash value will earn a maximum rate per year. Therefore, as an example, if the index that is being tracked by the policy returns 11% for a certain time period – and the annual cap on the policy is 10% – then the most that the policyholder will earn on the cash value component for that year will be 10%.

However, there is also a floor that is set with indexed universal life insurance policies. This feature will help in guarding against market losses in the cash value account. The floor is the minimum amount of annual interest that that policy will be guaranteed in a given time period.

Therefore, if the cash value is guaranteed not to go below 1% for a given year, even if the underlying index has a year when it returns a negative 14%, the policyholder will still return 1% on his or her cash for that period of time.

Advantages Of Indexed Universal Life Insurance

Although indexed universal life insurance provides some of the same protections that other types of permanent life insurance does, this type of coverage also offers a great deal more in terms of its overall flexibility.

Some of the benefits that are offered by this product include:

Tax-Free Death Benefit

One of the biggest benefits of any life insurance policy is the fact that the death benefit is free from federal income taxation to beneficiaries. This allows loved ones the use of the full amount of proceeds for paying off debts, replacing income, or any other need that they see fit for its use.

Tax-Deferred Growth

Also like most other permanent life insurance products, the cash that is inside the cash value component of an indexed universal life insurance policy is allowed to grow on a tax-deferred basis. This allows the funds to accumulate and compound even faster than if they were taxed each year.

Additional Growth Opportunities

Unlike whole life and many other types of universal life, indexed universal life insurance policies allow the crediting of interest of funds in the cash value component based on the performance of an underlying index such as the S&P 500. Therefore, the cash in these types of policies can essentially accumulate even more.

Funds Can Be Taken Out Tax-Free As Income

By taking out tax-free loans or withdrawals, the policyholder of an indexed universal life insurance policy can essentially receive tax-free income in retirement. This means that income from these policies do not need to be recorded as income to the IRS (Internal Revenue Service).

Annual Resetting Of Gains

Unlike a mutual fund or a stock, gains in the cash account of an indexed universal life insurance policy is essentially “locked in” each year and can never be taken away based on future market downturns. This will protect funds from the market’s ups and downs going forward.

Protection From Lawsuits And Creditors

In some states, life insurance cash values are also protected from lawsuits and from creditors – including bankruptcy, to an unlimited dollar amount. (This varies by state).

No Probate Issues

Because life insurance proceeds can pass directly to a named beneficiary, these funds will not be held up in the costly and time-consuming process of probate.

Protection From Market Losses

The cash value component in an indexed universal life insurance policy also offers protection from market losses. This means that principal is protected, regardless of what occurs in the market, or even in the economy overall.

Getting Cheaper Indexed Universal Life Insurance

Indexed universal life insurance is an excellent option for life insurance protection, especially for anyone that wants to use their life insurance for more than just insurance coverage. Indexed universal life insurance is more expensive than other types of life insurance options, but that doesn’t mean that your plan has to break your bank every month.

There are several changes that you can make that will help you secure much lower premiums, which is going to mean more money in your pockets. The top two would be to stop using any form of tobacco and to maintain a healthy diet to help you stay at a healthy weight and not have any future health issues.

Indexed universal life insurance can offer a great way to build up tax-deferred savings, while at the same time protecting principal from market losses. In addition, the death benefit can offer loved one’s peace of mind in knowing that expenses will be covered in the event of the unexpected. Let us help you find final expense insurance quotes today.

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. To be sure you are choosing the best policy for your family and financial goals look over the other forms of coverage before deciding.

The most popular option for insurance coverage is a traditional term life insurance plan. Term policies provide coverage to both young and old for certain periods of time from 10 year term plans all the way to 30 year term plans. 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.  Since whole life policies cover your life span, you will pay extra for them.

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 $50,000 worth of life insurance. For most families, this isn’t going to be enough life insurance.

Getting the most Affordable Life Insurance Plan

Most applicants are surprised to see how affordable than life insurance plan is going to be! So don’t be a prospective buyer thinking that your dream plan isn’t attainable. There are several ways that you can secure the lowest premiums from the insurance company and keep more money in your pockets.

After you submit your application, the insurance carrier will require a medical exam. Now this isn’t a full physical, but they will check your height, weight, blood pressure and also draw blood to see if there are any cholesterol problems and other issues. Once the carrier gets the results they could raise your quoted premium if you are outside the parameters for “plus” class plans.

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.

Another step towards lower monthly premiums is cutting any current tobacco usage. The carrier might not immediately give you a lower rate if you’ve only recently quit; so be prepared to pay at least double the standard rate until you’ve been off tobacco for at least 12 months.

If your lifestyle already checks the box on our first two suggestions then we recommend working with an independent agency, like ourselves, to narrow down the rates even more.

Since we’re not tied, or captive, to one certain insurance carrier, we know that no life insurance company is the same. Our vast knowledge will put you ahead of the game in searching for the perfect policy, and we can provide you with dozens of rates with the plans that fit you best.

Selecting a Plan

Are you ready to make the most important invest for your family? You and your loved ones will be appreciative that you’re taking the next step and securing the lifestyle and financial future. Tomorrow isn’t certain for anyone and we’re glad you’ve come to our site to learn more about getting covered as soon as possible.

If you think of any questions we’d love to answer them for you. Like the first rates you’ve received from our quoting tool? Then give us a call and we can move forward!

 

About InsuranceScored.com
About InsuranceScored.com

Susan Wright, CLU, ChFC, RHU, REBC, ADPA, CITRMS, CIPA has been in the insurance and financial field for over 27 years. Even with years of experience, she continues to create new resources for others. Everything from books to training material.

Susan received her MBA from St. Louis University and her BA from Michigan State University.

She has worked in several areas but excels in writing material for both finances and insurance. Her goal is to give professionals credibility and assist in streamlining the sales process.

She has written countless articles for a variety of websites.

About InsuranceScored.com
About InsuranceScored.com

Susan Wright, CLU, ChFC, RHU, REBC, ADPA, CITRMS, CIPA has been in the insurance and financial field for over 27 years. Even with years of experience, she continues to create new resources for others. Everything from books to training material.

Susan received her MBA from St. Louis University and her BA from Michigan State University.

She has worked in several areas but excels in writing material for both finances and insurance. Her goal is to give professionals credibility and assist in streamlining the sales process.

She has written countless articles for a variety of websites.

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