The basics of universal life insurance

By Maryalene LaPonsie on August 25th, 2011

parchmentCash value life insurance offers the opportunity to earn interest while also protecting your loved one's financial future. Of all the cash value policies available, universal life insurance is often considered the most flexible. These plans give policyholders greater freedom to change their benefit level and even reduce their premium payments.

Understanding universal life insurance

Universal life insurance is a type of permanent life insurance. That means the policy lasts for as long as you live, as long as premium payments are made. In addition, permanent life insurance plans earn cash value over the course of the policy. This money can then be used to pay for expenses such as college tuition, business start-up costs or other personal needs.

While other types of permanent life insurance may have fixed premiums and benefit amounts, universal life insurance policies allow individuals the flexibility to adjust these levels. This is possible because of the way in which these plans are administered. Premiums are deposited into a policy account which earns interest. The cost of the insurance and any other charges are deducted from the account. Once the account has gained a significant amount of interest, policyholders can reduce or even stop their premium payments and allow the interest to pay the cost of insurance instead.

Pros and cons of universal life insurance

For many individuals, the greatest benefit of universal life insurance is the ability to change premium payments as needed. Rather than having their policy lapse for lack of payment, those facing a difficult financial situation can let the interest in their account maintain their insurance. In addition, the death benefit is not fixed and may be adjusted as well.

Although universal life insurance can be a convenient financial product, it does not come without risk. By using the interest to pay for the insurance policy, you will be reducing the cash value. Should the interest become insufficient to pay the premiums, your policy may lapse. According to the Life and Health Insurance Foundation for Education (LIFE), some universal life insurance policies come with a secondary guarantee that can prevent the cancellation of your plan.

Who should buy universal life insurance

Like other forms of permanent life insurance, it can take time for universal life insurance plans to build cash value. The Oregon Insurance Division says it can take anywhere from three to five years for a plan to create cash value. Therefore, the division suggests these plans are best for those who can continue to make premium payments for 15 to 20 years.

Since universal life insurance is dependent upon market conditions, look for a plan with a guaranteed rate of return. The cash value of these plans is dependent on market conditions, and policies with a guaranteed return can provide peace of mind that your investment will continue to grow.

Overall, universal life insurance is best for individuals ready to make a long term commitment to their policy but who want the flexibility to make changes down the road. Consider one of these plans as a way to purchase financial protection and build cash value on a payment schedule that works best for you and your family.

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