WHY CHOOSE UNIVERSAL LIFE INSURANCE? WHAT IS THE DIFFERENCE?
UNIVERSAL LIFE INSURANCE
That means the policyholder decides how much to put in above a set minimum or a ‘target premium’. By extension, the policyholder also determines the face amount of the policy. Some need universal life insurance primarily for the cash accumulation. Doctors are a primary example, utilizing universal life policies as a deferred cash accumulation vehicle that’s protected from most malpractice suits.
Universal life insurance policies accumulate cash value — cash value that grows tax deferred. Guarantees are based on the claims-paying ability of the issuing company.
Universal life insurance policies normally let policyholders borrow a portion of their policy’s cash value under fairly favorable terms. And interest payments on policy loans go directly back into the policy’s cash value.*
When the policyholder dies, his or her beneficiaries receive the benefit from the policy. On that note, depending how the policy is structured, the benefits may or may not be taxable. Policies normally become taxable if they are funded over the MEC level – if this occurs, the policies becoming Modified Endowment Contracts, which carry various tax implications.
Accessing the cash value in your insurance policy through borrowing — or partial surrenders — has the potential to reduce the policy’s cash value and benefit.
It is important to work with an agent or advisor that properly illustrates the cash growth expectations with reasonable rate assumptions. Universal life policies issued in the 80s were illustrated with double digit rates, only to run out of cash as rates fell later on – this can cause lapses, where insurance companies will demand more of a premium to keep the policy going. This happens becuase as the cash value grows in the policy, the cost of insurance (COI) rises as well over time. Therefore, some of this cash growth that is illustrated is planned to be used to offset the future increase in the COI – it is important to under-promise and over-deliver!
Universal life insurance can be structured so that the cash value that accumulates will eventually cover the premiums. However, additional out-of-pocket payments may be required if the policy’s dividend decreases or if investment returns underperform.
Several factors will affect the cost and availability of life insurance, including age, health, and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder also may pay surrender charges and have income tax implications. You should consider determining whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.
Withdrawals of earnings are fully taxable at ordinary income tax rates. If you are under age 59½ when you make the withdrawal, you may be subject to surrender charges and assessed a 10% federal income tax penalty. Also, withdrawals will reduce the benefits and value of the contract. Life insurance is not FDIC insured. It is not insured by any federal government agency or bank or savings association.
Generally, loans taken from a policy will be free of current income taxes, provided certain conditions are met, such as the policy does not lapse or mature. Keep in mind that loans and withdrawals reduce the policy’s cash value and death benefit. Loans also increase the possibility that the policy may lapse. If the policy lapses, matures, or is surrendered, the loan balance will be considered a distribution and will be taxable.