Universal Life Insurance, also called Permanent Life insurance, is the type of policy where you also hear the term, “cash value”. The cash value is the difference between the amount of your premium paid, and what the insurance’s actual “costs” are. The difference accrues into a cash value, and the insurance company pays interest on this cash value it accumulates. Often times, in the earlier years of the policy, your premiums heavily outweigh the insurer’s “costs”, so you are basically accruing “cash value” on a tax-deferred basis.
Your death benefits and premiums are flexible, without having to rewrite the policy, if you decide to make changes. The cash value can be used to have your premium deducted, if you have enough value. You also hear about people borrowing against their “cash value”, however, these loans will be deducted from the death benefit, it not repaid and also will become taxable. We have many more Insurance Help Articles Now Available.
Many people chose Universal Life or Permanent Life as part of an investment strategy, they build cash value with tax deferment, if interest rates are high-they will earn interest above the insurer’s costs, and some policies are written as Variable Universal Life policies, where you can even direct investments in mutual funds and other stock and bond issues where the risk of return (or loss) may be available. You can also borrow against the cash value, in the event of an emergency, and they offer flexibility on the benefit or premium.
The advantage of Universal Life policies is the flexibility they offer. You can invest, borrow, and set premiums and benefits to fit your budget. The disadvantage is that you can lose cash value through a downturn in the basis investments, low interest rates or if the insurer’s costs deplete the cash value, making the policy worth nothing. If the cash value gets depleted due to downturns in investments or the insurer’s costs exceeding the cash value, the policy is expired, your premiums lost and you have no death benefit.
In contrast, Term Life Insurance is a policy that is purchased for a set death benefit amount, with set premium payments and a guaranteed payment to your beneficiaries, as long as you keep the premium payments current, no matter how the insurer’s costs or investments perform. It is a much safer and guaranteed life insurance policy, if your goal is to have a benefit paid after your death, to help your loved ones with expenses. Term Life Insurance is not really part of an investment strategy, but a protective strategy.
Universal Life Policies, as you can see are basically, a financial investment growth strategy, with risks involved that may or may not take care of expenses after your death. It is often called permanent, because, “it is permanent, as long as your cash value pays the premiums, or you pay the premiums, but your death benefit is not a guaranteed value, but it assumes it will be permanent as long as premiums exceeds costs, but it is NOT guaranteed your whole life”. As you can see, life insurance can be confusing, but may not be the best investment strategy. We have many more Insurance Help Articles Now Available.