Universal life insurance offers low-cost protection like term life insurance and a cash value component like whole life insurance. It's a flexible life insurance product that can be used in a variety of ways.
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Universal life insurance offers the best of both term and whole life insurance; like term insurance, it offers low-cost protection and like whole life, it offers a savings component. Universal life insurance is unique in that it offers payment flexibility and the option to adjust coverage over time. It can be used as a traditional life insurance policy to cover expenses, but it can also be used in many other ways.
Universal life offers several key features that are very different from both term and whole life insurance. It is important to understand these features so that you can maximize the potential of your policy and make informed decisions.
Like whole life, the coverage will last your entire life. However, with universal life, you are able to set the payment and the payment schedule for complete customization of your goals.
You also accrue cash value, which you can borrow against for future expenses. Universal life allows you to simply withdraw the money to avoid interest expenses you would be subject to if you borrowed the money. Your cash value also accrues tax-deferred at competitive rates.
Universal life can be used for creative financial solutions as such:
Christina is a 40-year old woman with two kids, Caleb and Nicholas. She is a single mother working as a high school English teacher. Due to her occupation, Christina is all too well aware of the very high costs of college education. Plus, as a single mother, she is always concerned about the future of her children should something happen to her.
While she has a 529 education savings account started for both Caleb and Nicholas, and a small savings account set aside for emergencies, Christina realizes this isn't enough to pay for her children's education or to keep them comfortable in the event of a tragedy.
Christina has decided to purchase a $750,000 universal life insurance policy. This option gives her the flexibility to change her payment amounts, and she can borrow from the policy if she needs to in order to help offset the costs of college. Plus, her kids are guaranteed to receive $750,000 tax-free if Christina passes.
Think of cash value as a sort of savings account attached to your whole or universal life insurance policy. It is only part of whole and universal life insurance; term insurance does not offer a cash value component.
Each time you make a premium payment, part of your money is deposited into this savings account. Over time, cash value grows as a portion of your premium payments are consistently set aside. In addition, you receive interest. Cash value and interest grows tax-deferred, meaning you won't owe taxes on it until you decide to use it.
Cash value is separate from the death benefit (also known as the face value); the death benefit is the value of money your beneficiaries receive in the event you pass away. Cash value may not be given to your beneficiaries, but is kept by the insurance company if you die.
The major difference between universal and whole life interest rates is that the rate can change with a universal life policy. The rate your cash earns is based on the current market. There are also guaranteed and non-guaranteed rates depending on the type of policy you purchase.
For example, if you have a guaranteed universal life policy, you could receive up to 4% with a guaranteed minimum of 3%. No matter what happens in the market, your interest rate will not drop below 3%.
But, you could also have a non-guaranteed policy that pays 5%. Because it's non-guaranteed, your interest rate could drop to 0% if market conditions are poor.
Learn more by contacting our life specialist.
Your needs are unique; that's why we offer a variety of life insurance riders, which are optional add-ons, that you can use to tailor your life insurance policy to fit your needs. You can use these riders to purchase additional insurance later in life, add coverage for your children, or pay for long-term care expenses.
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