Universal Life Insurance is a permanent life insurance that was designed to add flexibility to premium payments and provide a higher rate of return on cash values. It also usually provides the most tax advantages over other types of insurance.
Universal Life requires the insured to pay premium payments that are above the cost of the insurance. The additional money paid in the premium is credited to the policy’s cash value. This cash value earns interest on a monthly basis, and if no premiums are paid one month, that month’s cost of the insurance is deducted from the cash value. Interest earned may vary by month and rates are usually tied to a financial index.
Other benefits of Universal Life Insurance include:
- Substantial tax-advantages to heirs. In the early years on a policy, premiums far exceed the cost of insurance. The cash value that accumulates during these years can be quite substantial, and if the policy is held until death, the excess amounts contributed excess amounts contributed passes to the heirs completely free of taxation.
- Known expenses. All charges and costs are disclosed up front in the policy, where some costs are determined later in Whole Life policies.
- More flexibility in exiting policies which include zero interest or wash loans, which essentially enables the insured to access the growth in cash value free of income tax.
The three types of Universal Life Insurance are
Single Premium - where one substantial payment is made and the policy remains intake as long as the cost of insurance are covered.
Fixed Premium - where the payments are set for a certain time frame (10 years) after which the policy is paid up and no more payments are required.
Flexible Premium - where the policyholder may determine how much he/she wishes to pay each time the premium is due.
