There are many options to consider when choosing a life insurance policy. The first step in the selection process is to decide what type of policy to pursue. There are many conventional choices, but financial coordinators have now begun recommending a less typical type of policy known as universal life insurance. Universal coverage offers much more than just a policy. It acts to protect the family after the death of the insured, just like other policies. However, it is the unique features of the universal coverage option that make it different from most traditional options.
What Is Universal Life Insurance?
Universal life insurance is a type of policy that offers the owner almost unsurpassed flexibility and choice. These policies require an unprecedented level of involvement on the part of the policyholder because there is almost nothing fixed about them. They are based upon a cash value account, which the holder may add value to whenever he or she chooses. There is no specified rate at which funds must be added, nor is it standard practice to impose a specified minimum balance. Instead, the holder retains the complete right to manage the balance as he or she sees fit.
Traditional policies tend to lock the insured into an option for an average of 20 years, if not more. In contrast, universal life insurance offers the opportunity to monitor and change the plan every day if desired.
Why Cash Value Is Important
Most experts consider the cash aspect to be the centerpiece of any universal life insurance coverage. The account is similar to an account that would be found at a bank, including its ability to gain interest. The cash value is controlled by the person who owns the policy; they can make withdrawals and deposits, just as with any standard savings method. This feature is found only in universal life insurance. Other plan styles do not offer these types of unstructured options.
Because these plans offer an account, owners have unparalleled flexibility. There are many functions included that go beyond a simple deposit or withdrawal. A user can surrender his or her policy, terminating it in exchange for the total sum cash value at that point, less any applicable withdrawal charges. Another option is to take out a loan from the issuing agency. It is essentially a loan against the cash value, but behaves much like a loan from any other common source. Finally, the plan can also be collateral for a loan issued elsewhere.
Paying For The Policy
The account attached to a given plan does not itself constitute a universal life insurance policy. Instead, it is like a dedicated selection of funds set aside specifically for payment of the plan. On a predetermined schedule, the provider will debit funds from that account in order to pay for a predetermined amount of coverage. The provider then sends a detailed and itemized bill to ensure that the owner understands exactly what he or she is receiving.
There is one potential drawback to this system. Because the amount is automatically debited from the account, the owner must keep careful track of the balance. It is possible for this type of policy to lapse because there are not enough funds in the account itself, meaning that the policyholder would suddenly be without coverage. Although an agent may keep some sort of watch over an account, the ultimate responsibility always lies with the policyholder. Of course, the limit on how much can be placed into the tax-advantaged account are very high, so one may deposit enough to have quite a substantial cushion. Proactive measures like this can greatly reduce the risk of sudden loss of coverage.
Who Benefits From This Type of Plan?
Unlike most other policies, universal life insurance offers a unique opportunity to combine investment and coverage. Universal life insurance provides the same package of benefits as any other type of plan, but it has the additional bonus of the tax-advantaged account. For this reason, many individuals choose to purchase a universal life insurance policy for the tax-advantaged investment plan – even though that is not the main purpose of the policy. Money can accrue interest and be withdrawn at will, making it a safe choice that has benefits.
In addition, forward-thinking individuals can use universal life insurance to protect a business in the event of their death. The policy can help keep the business afloat and enable it to benefit from the rest of the accrued money. The same is true for anyone who will leave an estate, as the funds can help pay off estate tax. And finally, starting a plan early in life is an excellent option for retirees. Planning ahead and depositing more than the minimum into a universal life insurance plan can be a great way to ensure security after retirement.
With an understanding of this unique policy, individuals can not only plan for the future, but also for the present as needed.
SEEK INDEPENDENT ADVICE. All information expressed in this article is intended to be general information only. You should not rely upon this general information to make legal, tax, investment, estate or financial planning decisions. No portion of this article is intended to nor does it provide legal, tax, investment, estate or financial planning advice. For this type of advice, you must consult an independent advisor.