Universal Life Insurance Policies
Universal life insurance is a form of permanent life insurance that accrues a cash value when the premiums paid are higher than the cost of insurance. It is intended to have lower premiums than a whole life policy and does not have an expiration date, like a term policy. It is a form of hybrid policy to add flexibility and
How It Works
The premium amount is based on the cost of insurance (COI) normally based on term insurance rates, plus a small amount to be paid to accumulate a cash value. Premiums are paid over the life of the policy. While the policy is in place, the policy holder may borrow against the cash value and may increase or decrease the death benefit amount.
A person purchases a $200,000 universal policy. The insurance company determines the monthly cost of insurance at $100.00. The insured agrees to pay a premium of $175.00. The premium will first pay the cost of insurance amount, and the remaining $75.00.will be allocated to the cash value. The insurer will pay interest on the $75.00.
Features of Universal Life Policies:
• The policy continues through the life of the insured;
• Interest and dividends earned on the cash value are tax deferred;
• The policy holder may sometimes direct the manner in which the cash value is invested;
• Premiums are generally lower than whole life policies but slightly higher than term policies;
• Loans are generally tax free transactions;
• If a loan against the policy is outstanding at the time of the owner’s death, the loan balance is paid before death benefits are paid to the beneficiary;
• Beneficiaries usually do not pay taxes on death benefits.
• The interest rate on the cash value may increase as the cash value increases, creating a larger accumulation of equity in the policy.
Universal policies are popular forms of employee benefits. An employer can offer a group policy to its employees at a lower rate. Because of the cash accumulation feature, the policies can be considered a retirement benefit, giving the employer a tax deduction.
Because the premiums, death benefit and amount paid into the savings portion of the policy provide a flexibility, universal policies are popular with those who wish to use their insurance as an investment account.