What is Universal Life Insurance?

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Universal life insurance is a category of whole life insurance. It also offers an investment component, but premiums are less costly. Some liken it to term life insurance with the addition of a tax-deferred savings account. This means that any money paid over and above the annual cost of the policy becomes an investment. Interest accrues at the money market rate.

Universal life insurance is flexible in that the insured determines how much of the cost goes into the insurance policy and how much will be allocated to savings. You can also decide the premium amount, which can be a minimum that covers the cost of maintaining the policy or the maximum that the IRS allows. This allows policyholders to invest as much as they choose. In a regular whole life policy, the death benefit is payable as long as the insured keeps the premiums current. With universal life, if they don't contribute enough to cover all of its costs, the policy will lapse and there will be no benefit left for survivors.

With universal life insurance you know how much the insurance is actually costing you. With a traditional whole life policy, it is more difficult to determine the actual cost of the insurance. With a universal life policy, the insured has more options for accessing the accumulated cash tax-free. The policyholder may also change the death benefit of the policy and the premium amount. As long as the cost of the insurance is covered, a universal policyholder enjoys a lot of flexibility.

If enough money accumulates over the years to pay the death benefit and policy fees, the policy owner may no longer have to pay premiums. One thing to note is that it takes about 15 years to realize a healthy return, so you should view a universal life insurance policy as a long-term investment.

As with any life insurance coverage, it's up to you to decide which policy will best meet your needs. You can learn about insurance by talking with agents and brokers and by doing your own research. You can find many tools online that will help you.