In order to understand whether or not you need a universal life insurance policy, you should become familiar with what a universal life insurance policy is. Learning what a universal life insurance policy is and what it can do for you will mean the difference between choosing this type of life insurance or something else entirely. Universal life insurance is different than term life insurance in a variety of ways.
A Few Facts
Instead of paying a fixed rate each month, with the payment having no other purpose but to keep coverage alive, universal life insurance allows an additional amount to be set aside for months when no payment is applied to the account. Let's make this a bit clearer. A universal life insurance policy is a permanent type of life insurance that is based on a cash value. So, a insured person could make payments on the premium and an extra amount as well. The extra payment amount is applied to a separate account that is delegated by the insured account holder. So, payments to the life insurance policy can be universal, with the extra payment applied to future payments or a separate account.
Policy charges and fees may be drawn from the cash value of the policy after it has been deposited. Sometimes, the extra payment is paid into a financial index like a bond or other form of interest rate index. There are many uses for universal life insurance and the funds that are derived from the policy when it pays off.
Because it is a permanent type of life insurance, the policy is expected to pay out no matter what. So, as long as the premiums are paid up, the beneficiary can expect some sort of payment when the insured person dies. The pay out from the life insurance policy can be used to pay for a variety of things and many people take out their policies with specific costs in mind.
The final expenses of a universal life insurance insured person may have been left to family members to pay if no life insurance policy exists. However, with the inclusion of universal life insurance, all of these costs can be covered by the pay out of the policy. Things like funeral, burial and unpaid hospital bills can be taken care of entirely by the award of funds to the beneficiary after the insured's death.
Possible Uses
Sometimes, universal life insurance is used as income replacement for the beneficiary of the policy. Surviving spouses and dependent children can make use of the policy award after the death of the insured.
Debt coverage is another popular use of the universal life insurance award. Many people have personal and business debts that have no other recourse than to rely on the award of the policy. The surviving beneficiary can delegate where the funds go to and which bills get paid.
Estate liquidity is another popular option when there is no other way to pay taxes. The taxes can be for a variety of different reasons but they all have to be paid or the beneficiary will risk possession of the house.
Estate replacement, along the same lines, is used when a beneficiary needs to replace funds that were donated to a charity or other non-profit. Otherwise these funds don't get replaced and the house ownership could be in jeopardy.
Business succession and continuity is another popular reason. There are many bills associated with the successful operation of a business and the continuation of that business costs money. The funds from a universal life insurance policy can come in handy for this.
Key person insurance can be derived from the universal life insurance policy. This provides a business security should a key employee or manager die. Routing the funds from the life insurance policy into this type of insurance holding has proved a successful venture for years.
Executive bonus occurs when an employer pays the life insurance premium for a prominent person within their business. The premium can be deducted as a business expense and the employee pays the income tax amount on the premium itself.
In a similar fashion, a controlled executive bonus follows the same process with a few exceptions. The employee can't touch the funds from the policy until a time set by a contract drawn up by the employer.
Split dollar plans also involve the employer and employee but work in a slightly different fashion. Benefit amounts, cash surrender values and premium payments are split between the employer and employee or between an individual and a separate account. An example of this would be a trust.
These are just some of the ways that a universal life insurance benefit can be used but you get the general idea. There are many expenses in life that a universal life insurance policy can cover, making the financial existence of a beneficiary much easier and less stressful.
Living Benefits
Universal life insurance policies can have living benefits as well. The cash benefit can be used to pay for loans, withdrawals, collateral assignments, split dollar agreements, pension amounts and taxes. Policy holders are also able to take out loans from the insurance company based on the amounts they have paid into their policy. The loan has to be repaid no matter what but policy holders are able to rely on the cash values of the policy for repayment should no other means to pay it back exist.
These loans are not reported to any existing credit agencies, so a failure to repay the loan would not negatively affect the credit score of the policy holder. However, if insufficient funds exist to repay the loan, the policy will lapse and cease to be valid.
The withdrawal option on a universal life insurance policy is also possible. People can withdrawal the cash value of their policy without the need to take out a loan. withdrawals rely on premium amounts first and then gains. Tax free amounts are possible to be taken from the policy, which differs from most other means of withdrawing cash. The withdrawal amounts will ultimately affect the continuation of the life insurance policy. Take too much and the policy holder will endanger his or her ability to keep the policy alive.
This is the basic definition of universal life insurance. There is more to it but this is a rough draft of what you can expect.