Universal life insurance is a type of permanent life insurance that comes with an insurance component and a saving component known as cash value. In fact, experts believe that it is an excellent alternative to whole life insurance since the amount of premium you will pay is very flexible.
Like variable universal life insurance, universal life insurance allows you to use to invest your cash value in any investment vehicle you want. However, the difference between variable universal life insurance and universal life insurance is that the former allows you to earn any percentage of interests on your cash value while the latter allows you to get a fixed interest on your cash value.
To make it simple, if you buy universal life insurance and let’s say your annual premium is $10, 000. Your insurer can put $6, 000 in your insurance account and $4, 000 in your cash value account. You can use the $4, 000 to invest in bonds, shares, mutual funds, or any portfolio you like. But your interest rate is fixed depending on the agreement between you and your insurer. Your insurer may decide that your fixed interest rate is 3%. So, even if you make a gain of 5% on your cash value, your insurer will only assume you made 3% interest.
But the beauty of universal life insurance is that your cash value can accumulate over time to a level that you can use the accruals to pay for your premium (coverage) throughout your life. You can also borrow and withdraw money from your cash value account even though you will be taxed for it. But if you fail to pay back the loan, your death benefit will be grossly affected.
All in all, the success of universal life insurance largely depends on how and where you invest your cash value. So, if you don’t know anything about the investment markets or how to invest your cash value, it is advisable to go for whole life insurance. You can also contact us or your financial planner for more life insurance advice.