Choosing a life insurance that meets your needs and expectations can be a complex task, so we are going to tell you about the benefits you can get with Universal Life Insurance.
What is Universal Life Insurance?
This type of life insurance provides you with lifetime coverage as long as you pay your premiums. The death benefit payment will be delivered to your beneficiaries tax-free after you are gone.
This type of life insurance also offers you the ability to take advantage of the cash value component, which is separate from the death benefit and to which you contribute with each premium you pay.
In universal life insurance, each time you make a premium payment, a portion goes to cover the cost of the insurance and the rest of the money becomes part of the cash value.
This security may be guaranteed a minimum growth based on an annual interest rate, but may grow further depending on the market performance of your insurer.
Since premiums are split between coverage and cash value, you can choose how much to put toward each, as long as you stay within the minimum and maximum premium limits.
How can the cash value of a policy be used?
There are three ways to use the cash value of a universal life insurance policy:
Loan guarantee
You can borrow from the insurer using the cash value as collateral. Your total cash value will be the maximum amount of money you can borrow. The interest rates to be covered will be established by the insurance company.
Rescue value
Some policies define that in the event that you decide not to continue with the policy, you can receive all or part of its cash value. This will depend on each individual case, for example if you have acquired a loan on its cash value.
Premium payments
Cash value accumulated over several years is used to pay all or part of your life insurance premiums. This is a good option if you have the discipline to keep close track of how much of your cash value you spend, which, if it reaches zero, can cause your policy to be cancelled.
Types of Universal Life Insurance
There are some types of universal life insurance policies that differ according to the earnings it provides you and the guaranteed earnings. Their costs and characteristics can be quite different so we will explain each one.
Indexed Universal Life Insurance
It has the same features as standard universal life, but differs in that cash value growth is subject to index performance.
The S & amp, the P500, the NASDAQ 100, and the Russell 2000 are some of the most widely offered indices by insurers. According to the policies of your policy, you could choose one or several of them.
The cash value can also be invested by splitting it into two accounts: an index performance linked account and a fixed interest rate account.
Because fixed interest rate investing is lower risk it may produce a higher guaranteed minimum return, while index tracking investing may have a lower guaranteed interest rate but higher potential returns.
Variable Universal Life Insurance
Variable universal life is very similar to index universal life, but they differ in the way investments are made.
With this type of life insurance, the cash value is invested through pooled investments, which are similar to mutual funds.
You will receive a list of possible investments, a history of their performance, and the possible fees for each investment. Based on this information, you will be able to choose how much cash value will be invested in each one.
Please note that these investments will result in payment of administration fees which are similar to mutual funds. These administrative fees could affect your returns.
Guaranteed Universal Life Insurance
One of the main differences is that guaranteed universal life insurance will not lapse if its cash value equals zero, which makes it similar to term life insurance.
This type of life insurance is valid for a period of time and can end according to your age, which normally ranges between 85 and 121 years depending on your choice.
With no or very little cash value component, guaranteed universal life insurance is a good choice for permanent-type coverage at lower quotes.
Keep in mind that while the cost is significantly less than standard universal life insurance, premiums will generally be based on the length of your policy.
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