Universal Life insurance coverage is for your entire life and can be crazy flexible! Flexible premiums, adjustable death benefit, build cash value and lapse protection – crazy good stuff right? Check out this super short video and learn more about how universal life might just be the perfect fit for your life.
Your Universal Life Premium Options Explained
A Single Pay Premium universal life policy is paid for by a single, substantial, initial payment. Because single pay policies are instantly fully funded, the insured doesn’t have to worry about making any future premium payments. By doing so, the policy would likely be deemed a “modified endowment contract,” which affects the taxability of the access to cash values during the insured’s lifetime…but has NO effect on the tax-free treatment of the death benefit.
Level Premium policy
A Level Premium policy features premium payments that are designed to be level (or fixed) over the life of the policy.
A Flexible Premium policy features premiums that can increase, decrease, stop, or be temporarily suspended, according to your needs. The premium’s flexibility is specified in each policy. Flexible-Premium policies include a risk that the policyholder may have to pay a premium rate that is greater than expected to maintain the policy’s viability. This can happen if the expected interest paid on the accumulated value of the policy is less than originally assumed at the time of purchase, or if other charges (i.e. mortality charges) increase beyond what is assumed when the premium is calculated at inception.
Adjustable Death Benefit
Policyholders can modify the amount of their death benefits and premiums as their needs and goals change.
Builds Cash Value
As with Whole Life policies, Universal Life Insurance builds cash value. But cash values on today’s universal life policies (especially those that are less expensive than whole life policies) tend to be much smaller.
Most Universal Life policies come with an option that allows the policyholder to take out a loan/borrow money against the cash value of their policy. These loans require you to make interest payments to the insurance company. The insurer charges interest on the loan because they are no longer able to receive any investment benefit from the money they loaned to the policyholder.
Outstanding loans are deducted from the death benefit when the insured has passed on.
Most Universal Life policies also come with an option that allows for tax-free withdrawals up to your basis in the policy. You can also borrow against the cash value using policy loans. If you borrow money using the policy’s loan features and die with the loan not having been paid back, the balance of the loan will be deducted from your death benefit. It is not recommended to take policy loans on a No Lapse Universal life policy as by doing so, you may jeopardize your guaranteed death benefit.
With the No-Lapse feature (or “Secondary Guarantee”), the policy promises to stay in effect for the guaranteed period (usually the insured’s life) if the premium is paid on time, even if the cash value has run out. These policies can be incredibly valuable as death benefits are guaranteed as long as certain conditions are met, and premiums are paid, as scheduled.
The lower premiums on a Universal Life policy introduce a level of risk. The growth of your cash value is partially dependent upon current interest rates. If at any time, interest rates drop and the assumed growth of your cash value fail to meet expectations, the current cash value may not be enough to sustain your coverage. A period of prolonged lower-than-expected interest rates could wipe out all of your cash value, and could leave you holding the bag monetarily to make up the difference, in order to keep the policy in force.
So, how much life insurance do I need?
How much insurance you need is determined by your individual situation. As a result, following a “rule of thumb” is not the most responsible advice we could give you. However, there are some tricks that we have learned over the years. Our biggest trick is our Nifty Life Insurance Calculator below. Take it for a spin, and better understand how to cover your life.
Nifty Life Insurance Calculator
Our Life Insurance Calculator can help you get a rough idea of how much coverage you’ll need to make sure your family is okay financially when you die.
Annual income before tax: $Annual income is an important factor in determining your needs, but it’s not the only one. When you die, your life insurance is like your final paycheck.
% of income needed by dependents: %Because you’ll be gone, presumably they won’t need as much as you’re currently earning. Typically, 80% of your current income is a good place to start.
Your Age: yearsThe younger you are, the more years of your income your family stands to lose when you die.
Number of years benefits are needed:If you died tomorrow, how many years of income do you want to provide for your family?
Annual inflation rate (estimate): %Because of inflation, in order to maintain your family’s current standard of living, you’ll need to plan for increases in their annual income to keep pace. Historically, inflation has averaged between 2% and 4%.
Annual interest rate (estimate): %This is an assumption as to how much you believe your spouse will be able to earn on the death benefit proceeds. We have found that most surviving spouses are usually very conservative in how they invest the death benefit. The most common thing we see is that the money gets deposited into a bank account. You know your spouse better than anyone. Pick a number that you feel your spouse will be able to comfortably earn on the proceeds.
Now what? Call 800-496-9083 and we’ll help you figure out what kind of policy makes the most sense for your life situation.
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