Universal Life Insurance Policies

Universal life insurance, which is also known as group universal life or group variable life insurance, is a policy that allows you to change the amount of insurance you need as your need for insurance changes. Keep in mind, however, that as is the case with all life insurance policies, the primary benefit is to protect your loved ones from a financial hardship after you're gone.

Benefits of Universal Life

Just like whole life insurance, the benefits of universal life insurance go well beyond those of a term life insurance policy. For example, universal life provides you with the option of funding a tax deferred accumulation account. Other benefits of universal life include:

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Additional Flexibility - you can adjust the amount of life insurance you carry as your needs for life insurance change.
Tax Free Benefits - the proceeds from life insurance are generally not taxable under current law.
Tax Sheltered Growth - a universal life plan allows you to place money in a tax sheltered account where the money can grow on a tax-deferred basis.

Choosing Universal Life Insurance

The life insurance industry has worked hard to structure a variety of insurance policies to suit an assortment of individual needs and interests. If you're struggling with the decision between term insurance, whole life, and universal life, here are some questions that might help you decide if a policy beyond term insurance is really necessary:

Do you have a spouse or child that depends on you for financial support?
Does your spouse have insurance coverage? Does your spouse have enough life insurance? Universal life policies often allow you to add a spouse or a child to an existing policy.
Do you have significant debt that your family would be responsible for if you were no longer around?
Do you have a savings goal that a tax-deferred account could help you meet?
Will your need for life insurance vary over time?

These last two questions are important, because as we will see, one of the primary features of universal life is the tax deferred cash balance.

Tax Deferred Cash Account

A universal life insurance plan offers you benefits beyond those of term life insurance, including a tax deferred cash balance. For some, term life may be enough, but for others the benefits of this type of account are important.

Just what can you do with the tax deferred cash balance? The following list contains some of the more common uses of that fund:

Continuing Coverage - you can continue your life insurance coverage by paying the insurance premiums using the balance in your tax deferred account.
Elect to Own Paid up Coverage - you can use this money to lock in a fixed amount of paid-up insurance coverage. With this option, you never have to pay another premium again.
Establish an Annuity - once you have sufficient funds in your tax deferred account (let's say $20,000 or more), you can choose to receive regular payments in the form of an annuity.
Surrender Value - anytime you decide you no longer need universal life insurance coverage, you can receive the total value of your tax deferred account.

Finally, you may be able to borrow money from this account. Check with your specific policy, but interest expense and earnings on contributions back to the fund are usually tax deferred.

Universal Life versus Universal Variable Life

It's important to understand that not all life insurance policies are alike. This rule holds especially true when you go beyond term insurance. Also keep in mind these policies can be offered as individual policies, or many times as group insurance through your employer.

We will finish up with a brief summary of the differences between two separate, and distinct, types of universal life insurance policies offered today: universal life and universal variable life.

Group Universal Life or Universal Life Policies

These are generalizations, but also good indications of what you can expect with a group universal life plan or simply a universal life policy:

Tax deferred cash fund contributions will earn a fixed interest rate that is usually guaranteed by the insurance carrier or underwriter.
These policies offer low risk, with a safety of principal.
There are usually no expenses or fees.
You have the flexibility to decide how much you contribute.

Group Universal Variable Life or Universal Variable Life Policies

The primary difference between universal life and universal variable life is that variable policies allow you to earn a rate of return beyond a fixed rate. In most cases, you can choose the risk and reward balance you're comfortable with for this type of account.

Here are the other benefits of a group universal variable life, also known as a universal variable life policy:

Your contributions can usually be allocated to a fixed account, variable account, or both.
You have the opportunity to earn various returns on contributions allocated to the variable account.
You select the level of risk with which you are comfortable.
Management and / or administrative fees may apply.
Minimum investment contributions may apply.

Most insurance companies will allow you to take what is termed a free-look period - usually around 45 days or less. During the free-look period, you may cancel your coverage without penalty.

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