Universal Life Insurance is a type of permanent life insurance that offers both a death benefit and a cash value component. This insurance product is designed to provide policyholders with the flexibility to adjust their premiums and death benefits to suit their changing needs over time. The premiums paid into a universal life insurance policy go toward both the cost of the insurance and the savings component, which is credited each month with interest. The interest rate is determined by the insurer and may be tied to a financial index.
One of the key features of universal life insurance is its flexibility. Policyholders have the ability to increase or decrease the amount of their death benefit, as well as to adjust the size and timing of their premium payments, within certain limits. This can be particularly useful for individuals whose financial situations may change over the years, allowing them to adapt their life insurance coverage accordingly.
The cash value of a universal life insurance policy grows on a tax-deferred basis, which means that taxes on interest earnings are not due until the money is withdrawn. Policyholders can borrow against the cash value of their universal life insurance policy or even make withdrawals, although this may reduce the death benefit and can have tax implications.
It is important to manage a universal life insurance policy carefully, as costs and fees can reduce the cash value. If the cash value drops too low or the cost of insurance increases, the policyholder may need to pay additional premiums to keep the policy in force. Universal life insurance is best suited for those who seek long-term coverage with an element of savings and investment, along with the ability to adjust their policy as their personal circumstances evolve.