This type of life insurance gives you more options than whole life. For instance, you can increase the benefit and you can withdraw money from the policy if it has a cash value. Universal life insurance is just one of several types of life insurance policy available through life companies today. Unlike term life insurance or mortgage (reducing) life insurance, universal life insurance gives your insurance policy a cash-in value, allowing you to withdraw funds accumulated on your universal policy as and when needed.
This flexible approach to life insurance is very popular and offers a real alternative to standard term & mortgage life policies where the policyholder does not normally get to benefit directly from the life insurance funds, unless they are diagnosed as being terminally ill. Universal life insurance also provides policyholders with the ability to accrue interest on their life insurance premiums - something that a standard life insurance policy does not offer.
Universal life insurance works in a similar way to a high interest long-notice deposit account. When an insurance premium payment is sent to the life company the company deposit the funds into an interest account after deducting a nominal expense charge per deposit. The funds then gain interest, with interest accrued being credited to the account on a monthly basis. Each premium payment made of course increases the fund, while compound interest is earned on the account month upon month. The cost of maintaining the insurance product or products purchased through the universal insurance scheme are also deducted from the universal account on a monthly basis.
Should the insurance policyholder wish to withdraw funds from their universal life policy then they can do so from the cash surrender value of the life policy. Withdrawals are normally controlled / limited to a set number per year. Depending upon the policy provider there may also be caps on the amount of money that the universal life policyholder can withdraw and a stipulation on a minimum amount of funds that should remain in the universal life account.
It should go without saying that withdrawals from a universal life insurance policy will reduce the overall amount of funds available when a lump sum claim is made upon death or terminal illness diagnosis. It is therefore important to manage the universal life account to ensure that there is sufficient coverage for your family and dependents in the event of your death. If you don't have the time to carefully manage a universal life product then you may end up with little to show for your life insurance premiums if and when a lump sum payout is triggered.
It should be noted that there is a similar type of policy that was designed from aspects of the universal life policies and that is called the Variable Universal Life (VUL) insurance policy. VUL policies allow the cash value to be directed to a number of separate accounts that operate like mutual funds and can be invested in stock or bond investments with greater risk and potential reward.
Lastly, there are the Equity Indexed Universal Life policies that work by investing in Index Options such as the S&P 500, the Russell 2000, the Dow, and other indexes. These types of contracts only participate in the movement of the specified index and do not participate in the actual purchasing of stocks, bonds, or mutual funds.
One reason people choose universal life policies is that they offer a greater potential for increasing cash value growth when the interest rates that are used for the policy outperform the insurer's general account. There are other benefits as well.
Universal life insurance is also more flexible than whole life insurance in two important ways:
- The death benefit amount and often the premium payment amount are more flexible. Under certain conditions, the death benefit can be increased or decreased without actually losing the policy or having to begin anew as would be the case with whole life.
- The second way universal life offers more flexibility is that it allows for a larger range of premium payments. These can range from the minimum amount allowed to cover the policy up to the maximum amount allowed by the IRS.
The main difference between whole life and universal life is that universal life shifts some of the risk for maintaining the death benefit to the insured. Conversely, with a whole life policy, as long as all the premium payments are made, the death benefit is guaranteed to be paid once the insured dies. With universal life, the policy will lapse and the death benefit will no longer be available if the cash value or premium payments are not enough to cover the cost of insurance.
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