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Universal Life Insurance and Indexed Universal Life Insurance

Universal Life Insurance 

Universal Life Insurance is a form of permanent life insurance coverage. This type of life insurance also provides a death benefit and a cash value component where the funds are allowed to grow tax-deferred. Universal Life Insurance is more flexible than whole life coverage, though. This is because the policyholder is allowed – within certain guidelines – to choose how much of his or her premium dollars will go towards the policy’s death benefit, and how much will go towards the policy’s cash value.

Because universal life is a permanent life insurance policy, the policyholder will have access to their cash value account. So, just as with a whole life plan, the cash can be borrowed or withdrawn for any reason – including paying off debt, supplementing retirement income, or even going on a vacation. 

Universal life insurance policies have many moving parts. There are many things to consider when purchasing a universal life insurance policy. Some of the advantages to consider are the flexible premiums, a level or increasing death benefit, and a tax-deferred investment opportunity to the insured. A policy holder can overfund the policy in addition to the monthly premium, and build a cash value. The cash value will grow interest over time, and may be borrowed from, or used to subsidize the cost of the life insurance policy premiums in the future. Some of the disadvantages to consider, are the cash value are based on market gains and losses, management fees the insurance carrier charges, and borrowing funds can devalue the benefit paid to beneficiaries at time of death. Universal life insurance is a great option for those seeking life insurance that can be borrowed from, and that has a cash value build up, but it is best to learn how all the benefits work before deciding to purchase.  

Indexed Universal Life Insurance

Indexed Universal Life Insurance plans are similar to traditional universal life insurance, but have some different features. Indexed universal plans (like all universal life insurance) carry a death benefit and a separate cash value that increases over time, but differ in how the non-insurance part of the plan is structured. How it works primarily is, the premiums paid goes toward the life insurance cost, fees, and with the rest going toward the cash value of the policy. The main difference is that the cash value pays a return based on increases in an equity index, like the S&P 500, versus a fixed rate as with standard universal life insurance plans. 

Like universal life Insurance, indexed universal life also has many moving parts. Here are some of the advantages and disadvantages to consider when purchasing an Indexed Universal Life Insurance Policy. Some of the advantages are the tax-deferred growth of the cash value, no contribution limit on policy contributions can make them attractive for tax purposes because of tax-deferred growth, exposure to stock market indexes may offer better long-term growth versus other universal life plans, premiums can be lower than traditional universal life insurance plans, lower risk than stock investing, since cash value won’t decrease if the target index falls, may offer better returns than other universal plans in a strong stock market. Some of the disadvantages can be since the insurer makes its money by keeping a portion of the gains, returns will always trail the index, the insurance policy may pay lower returns than other universal life plans in a poor stock market environment, and depending on your situation, the total costs paid may net less long-term benefits versus other insurance and separate investing alternatives. 

Universal life insurance and indexed universal life insurance policies can be very complicated insurance policies to understand, and is best purchased through an insurance professional. Understanding all the moving parts can be a very detailed process, and it is advised to seek professional assistance to understand how to best utilize the benefits of the insurance policy you are purchasing. We at Healthcare American are experts in these types of polices, and would be happy to speak with you, and provide you with our expertise. Please give us a call