Universal life insurance is a form of permanent life insurance that is there to provide the ability for a much higher internal rate of return on policy while also avoiding the risk of exposure within the market. Universal life insurance contracts have a cash value account that the policy owner can fund as much as they like, which then enables any cost of insurance charges to be removed from this account. As long as the policy owner funds the account and a certain amount of money is within the account, then the policy will never fall victim to a grace period or lapse. The cash value of this account will then be subject to paying an interest rate, which is no less than 2% according to the law. As these interest rates fluctuate, the payment rates will also.
Is Insurance Becoming More Expensive?
Life insurance charges within a universal life insurance contract are extremely similar to that of a variable universal life insurance contract. This is because the two are both priced like a permanent form of non-level term life insurance. Getting older with your life insurance policy will cause the cost of the policy to rise and will be adjusted to your insurance cost roughly once a year.
As the contract is taken out, there is a maximum cost of insurance per each year/age, and the cost of your policy will range beneath the stated maximum by the provider. This has been labeled as an issue, simply due to the problem of insurance policies becoming very costly in later years. This is why it is important to be prepared for these costs, either through cash value growth or by paying more into the policy.
Utilizing a Premium Payment Structure
Fortunately, there are premium structures for individuals with a universal life insurance policy. Policy owners are able to make payments as often as they seem fit and for any amount that they wish. With a cash value to cover any cost of insurance, there will be an active policy that is labeled as good standing.
This form of payment structure is relatively suitable and puts more responsibility on policy performance on the client’s actions instead of the insurance provider. The policy performance is almost entirely dependant on the client, and if the clients are unable to meet any expectations, then the policy will not perform well. Therefore, paying the premiums and meeting requirements is a necessity in terms of keeping your policy in good standing.
The Amount of Interest Paid on the Cash Value
With all loans, there is a minimum interest rate that is tacked onto it. While many of the excess premiums paid over the insurance cost will then add to the cash value, the cash value will then earn a stated rate of interest that will fluctuate with the market rate, with the minimum rate being a return of 2%. There are also universal life insurance policies out there that have cash value returns that are tied to an equity index.
Withdrawing Money or a Loan From Your Cash Value
A large portion of life insurance policies will allow you to withdraw money or a loan. Withdrawals are taken from your cash value and loans are taken from the policy against the value. Withdrawing your cash value can only happen after so many years of having the policy, usually after 10 to 15 years of the policy being issued. There are other factors as well such as what insurance company it is, what policy series are offered and issued, and various others.
With withdrawals, they are usually only taxable on a gain, and the gain has to be the last of any money to come out of the policy. Withdrawals also greatly reduce any death benefits received by beneficiaries, while loans do not reduce death benefits if they are paid back. The only way that a loan can take away death benefits is through not paying the loan back, which then the death benefits will be reduced by the amount of outstanding loan. Loans are not needed to be paid within a particular schedule or even at all, but if left unpaid, a loan will then continue to grow through a specified interest rate, which will increase the amount each year. After some time, a substantially large loan will then consume any available cash value and the policy will then lapse.
Why Universal Life Insurance Policies are Used
Universal life insurance policies can grow over time, much faster than a whole life insurance policy. This is because of the variable interest paid on the cash value of the policy, and the policy can be much safer than a variable universal life insurance policy due to its lack of being subject to market fluctuation. Having a well funded universal life policy can be beneficial to a policy owner that is looking to potentially withdraw money or take out a loan after so many years of owning the policy.