Universal life insurance is permanent life insurance. Universal policies have three separate parts: The premium that is paid to the insurance company by the insured, the death benefit this is paid by the insurance company to the beneficiary upon the death of the insured and the vested amount of the cash account that accrues over time. The premium that the policyholder pays is placed in this part of the policy.
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How Do Policyholders Earn Money on a Universal Life Policy
Universal life insurance policyholders direct their insurance companies as to how the money should be invested. Policyholders are usually able to choose among several different investment options in order to meet their individual needs. If the value of the investments increases, the cash account is credited with the earnings. If the value of the investments decreases, that amount is deducted from the account. The primary danger of a universal life insurance policy is that it can lose value, especially during volatile financial times.
Universal life insurance policies pay a death benefit that can either increase or decrease in value. Therefore, universal policies are part insurance product and part investment product. Only insurance agents who are registered securities dealers can sell universal life insurance policies. As an investment product, universal policies almost always pay a return that is guaranteed by the insurance company. However, the return is often less than that of a whole life policy. The fees associated with managing the investments are more than with other policies.
Universal life insurance policies are like whole life policies in that a portion of the premium is applied toward the cost of providing the insurance to the policyholder. But, the gains earned on both types of policies are tax-deferred. Those considering a universal life policy as an insurance product or as an investment product must make sure that the company they buy the policy from is financially stable. A universal life insurance policy, like all life insurance policies, represents a financial obligation to the insurance company that may not occur for decades.
If a policyholder buys the policy at age 55, the company may not have to pay the claim for 20, 30 or more years. Choosing an insurance company that has been awarded a high rating by one of the four credit rating agencies (A.M. Best, Fitch, Moody's, Standard and Poor's) is always a good idea.
Why Buy Universal Life Instead of Term Insurance
Life insurance policies are divided into two categories: Term policies and permanent policies. Term life insurance is temporary. It is in force for a limited period of time and matures when the insured stops paying premiums, when the death benefit is paid to the beneficiary or if the insured is still alive at the end of the term. A term policy must be repeatedly renewed for coverage to continue beyond the end of the term.
Permanent insurance lasts for the entire life of the insured as long as he or she pays the premiums according to the insurance contract. A permanent life insurance policy
matures only at the time the death benefit is paid out, although some states will consider a permanent policy mature when the insured reaches the age 95 or 100. Consumers are advised to check with the insurance company to find out at what age a permanent life product matures in the state where they reside.
Permanent insurance policies build cash value over time. The policyholder can borrow against and use as collateral the value of the cash account. Term insurance is strictly about the death benefit. It does not have a cash-building component and has no value other than the amount that will be paid to the beneficiary.
For policyholders who have the financial discipline and available cash to make the premium payments as scheduled, a universal life insurance policy can be a much more cost-effective choice than term insurance. Term insurance is temporary and does not have an investment option. The cost of renewing a term insurance policy can sometimes be more expensive than purchasing a universal policy. And, very few insurance companies will issue a term policy after an insured reaches age 75. A universal life policy can also provide better financial stability by growing at a rate higher than inflation.
Who is Best Suited to Buy Universal Life Insurance
Insurance agents and companies need to make sure that the products they sell are suitable for their clients. Universal insurance policies can be suited for those who want to make sure that final expenses such as funeral costs are covered. But universal policies are more suited for those in need of financial and estate planning products.
Like immediate annuities, universal life policies can be bought with a single premium. If the goal of the insurance policy is to leave cash to a beneficiary or to avoid a lengthy probate, a universal life insurance policy is a good choice. Those wishing to leave cash to a favorite cause can also name a charity as the beneficiary.
What differentiates a universal life insurance policy from other common investment products is the ability a business owner has to deduct the premium as an expense if he or she gives it to an employee as a gift. Business owners who cannot give an employee a cash bonus can usually provide a life insurance policy as a bonus. Wealthy individuals or those who need to shelter assets from lawsuits usually also benefit from universal life insurance policies. Most states consider insurance and annuity contracts as irrevocable.
So, universal life insurance is part insurance product and part investment product, primarily suited to individuals who need to ensure that their spouses and children will have access to cash if they should die prematurely. For the main breadwinner who wants to make sure that his or her family, and maybe a parent or adult sibling with special needs, will not suffer from financial hardship, a universal life insurance policy can supply enough cash along with a large death benefit.
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