Universal Life Insurance

The first type of permanent life insurance that we look at is universal life insurance. Universal life insurance is also called adjustable life insurance. Remember that, with permanent life insurance, some of your premium is invested. Features of universal life include:

Flexible premiums. After you pay an initial premium, universal life insurance provides flexibility in paying your premiums. For example, if the portion of invested premiums is growing, you can pay future premiums from this buildup in value.

Of course, the investment performance determines how much, if any, flexibility you have to modify your premiums. With universal life insurance, you invest a part of your premiums in a money market account or similar investment that earns a stable, positive rate of return. Insurance companies also offer universal life insurance with a guaranteed minimum rate of return.

Cash value feature. The portion of invested premiums accumulates a cash value. This cash value is held in an accumulation fund. You can withdraw the cash value from a universal life insurance policy. You can also claim it as an asset when you apply for a loan. Any withdrawals from the accumulation fund are deducted from the policy's cash value.

While the invested premiums of a universal life insurance policy are generally restricted to safe, low-yielding investments, a variable universal life insurance policy lets you invest a portion of premiums in riskier investments such as stocks and bonds. Variable universal life is a hybrid. It combines features of universal life and variable life insurance.

Death benefit. With universal life insurance, your beneficiary receives a death benefit when you die. Your beneficiary generally does not owe federal income taxes on the death benefit. Death benefits are also free from probate costs and can be protected from creditors in case of bankruptcy. Because of these features, universal life insurance is often used in estate planning.

The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.