How Universal Life Insurance Works
Universal life insurance is made to be flexible. As the policy owner, you have the control to make changes to the policy as your needs change. There is an insurance component and a cash account associated with a universal life policy. The cash account accrues interest each year on a tax-deferred basis.
Universal life insurance allows you to decide your initial premium amount. As your life situation changes, you can increase or decrease your premium amount. You are encouraged to add lump sums to build up your cash value.
Premium payments for a universal life policy cover administrative fees and other expenses. The remainder of the balance is deposited into the policy's cash value. The cash value earns interest each month and is tax deferred. Over time, your policy's cash value can increase enough to cover your regular premium payment.
When you purchase a universal life insurance policy, you have the option to choose one of the death benefits that are offered.
- Option A: This benefit stays level and as the cash value increases, it helps offset any periodic increases in the monthly insurance charges.
- Option B: The death benefit equals the original amount you select, plus the cash value.
Partial withdrawals of the policy's cash value are also permitted, when needed. There are some charges that may apply for each withdrawal and there are generally limits of how much can be withdrawn. The withdrawals are also subject to taxation, depending on the plan.
One major advantage of holding a universal life insurance policy is that it fluctuates according to the policy holder’s needs.