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Universal Life Insurance: How Does it Work?

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In addition to the death benefit it provides, universal life insurance also includes savings. The combination is similar to that of tax-deferred interest building in a savings account along with having a term life insurance policy. A major benefit of a universal life insurance policy is that the policyholder may not have to pay premiums during the policy’s life. If enough money accumulates in the tax-deferred savings account to pay the death benefit, a policyholder will eventually not have to pay any premiums to keep the policy active.


Since universal life insurance policies are also investment vehicles, people who predict they will require life insurance into their 70s are the ones who benefit the most from these types of policies. By the time a policyholder reaches that age, he or she will have saved for enough time to likely have a solid amount. For those who may not need life insurance at this age, they may roll this into an annuity, put this into another type of investment or just cash out. For those who feel universal life insurance is optimal, it is important to plan on keeping the policy long term. The policy must be active for at least 15 years in order to qualify for any return. Also, it is important to contact an agent for help in comparing options such as whole life insurance versus term life.

Living Benefits Of Life Insurance
Many people buy life coverage, but they do not buy it only to serve as a source of money for survivors. Some types of life insurance include options such as withdrawals, loans, collateral assignments and other features that the policyholder can use while he or she is still alive.

Loans
The majority of universal life policies provide the option for the policyholder to take a loan on specific values associated with a policy. Interest payments are required, and they are paid to the insurer. While it is not necessary to repay the principal, it is mandatory to repay the interest. If the interest is not paid, it is deducted from the policy’s cash value. At a certain point, a policy with unpaid interest will lapse. These types of loans are not reported to credit agencies, so they do not affect credit ratings either way. Outstanding interest is subtracted from the overall benefit if the policyholder dies before it is paid off.

Withdrawals
Equity-indexed universal life policies may be tax-free income if they are used following IRS regulations. A person must not withdraw amounts that exceed the total premium payments. Most policies come with options to withdraw cash instead of taking a loan, but it is important to remember that withdrawals lower the overall death benefit. Tax-free withdrawals are possible through internal policy loans, and these apply against any cash value the policy has. When used in accordance with IRS regulations, this type of policy can be a great long-term investment that outperforms mutual funds, CDs, stocks and bonds.

Collateral Assignments
These are often put on life insurance to provide a guarantee on the loan after the death of the debtor. When collateral assignments are placed on life insurance, the assignees receive the money they are due before the beneficiary receives payment. If more than one assignee exists, then they will be paid based on the assignment’s date. For example, the assignees listed first will be paid first, and the assignees listed last will be paid last.

Different options will work better for different people based on their individual needs, age and financial status. To learn more about these life insurance plans and which ones best fit personal requirements, discuss concerns with an agent.

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