When it comes to life insurance, there are several common types, including universal life insurance. Universal life insurance is a permanent, flexible type of insurance. It offers several key benefits over other types of insurance, but generally has higher premiums.
Universal life insurance was introduced in the 1980s. It is similar to whole life insurance because it offers a savings component, and the premium payments made into the account grow on a tax deferred schedule. The insurance companies, that issue this type of insurance, invest the premiums they receive in mortgages, bonds and money market funds. The return earned on these investments is credited to a policyholder’s account. Most policies also offer a minimum interest rate payment of around 4%; which is guaranteed to the policyholder.
One key benefit of universal life is that the money paid into the account is similar to a savings account. The accountholder is free to withdraw or borrow money from the policy’s cash value. Each time money is withdrawn or borrowed out of the account, the amount of benefits is reduced for the beneficiaries of the account.
Another detail of universal life is that policyholders are required to pay a monthly premium. From this amount, the insurance company deducts charges for expenses or insurance protection. A benefit of this type of insurance is that the policyholder can pay his monthly premiums with the interest earned each month on his account and the policy stays in effect as long as the account has cash value in it.
There are several common reasons why people choose universal life insurance. The most common reason is to plan for the future. Because of the withdraw capabilities this insurance has, people use it as a savings plan to protect them in the event of job losses, educational needs or large purchases. Another common reason for all insurance types is that it protects loved ones when the policyholder dies. It offers a payout which is used to cover funeral expenses, debts and living expenses for the beneficiaries. When beneficiaries receive the insurance payout, at time of death, it generally is tax free money.
On the downside, many people also believe there are several disadvantages with this type of insurance. The first one is that because many people use this insurance as a retirement savings account, they are bound to make withdrawals from it. Each time this happens, the value of the benefits the beneficiaries will receive decreases. Many investors also believe that most people would be better off investing their money themselves, in an IRA or other type of retirement account. The final downside is that the fees associated with a universal life insurance account are generally much higher than other types of insurance or retirement accounts.