If you’ve been in the process of solidifying plans for your family’s financial future, getting life insurance is most likely on your to-do list. Finding the right life insurance policy can be difficult with so many options available. While term and whole life insurance are the most common types, universal life insurance is a lesser-known option with its own benefits.

Keep reading to learn more about universal life insurance and some of its best features to help you make the right decision for you and yours.

What is universal life insurance?

So, what is universal life insurance? Universal life insurance offers lifelong coverage as long as you pay your monthly premiums, but unlike whole life insurance, it offers flexible premiums and an adjustable death benefit. You can choose how much you pay for your premium and when you make your payments.

This type of policy also allows you to create a savings vehicle as part of your plan design. Depending on your investment, proceeds from this account can accumulate over time.

Benefits of universal life insurance

Some benefits of universal life insurance are below.

Cash value

A universal life insurance policy can potentially build a cash value over time. When you pay your monthly premium, a portion is contributed to the eventual death benefit, while the remaining portion goes towards the policy’s cash value.

Once your policy has accumulated enough cash value, you can borrow against it to fulfill any financial needs. You can borrow against your policy’s cash value anytime, but note that it may take several years for your policy to accumulate enough cash value to be useful for a loan. For instance, you may want to borrow against your policy to pay off a medical bill or cover an expensive car repair.

Flexible premiums

With universal life insurance, you can decide how often you make your monthly payments and adjust the amount. Paying higher premiums allows the policy to increase in cash value. Once the cash value is high enough to cover your premium costs, you may be able to reduce or pause your premium payments.

Maintaining a positive cash value to pay premiums is important because the policy may otherwise lapse. Using the policy’s cash value to pay premiums won’t affect your death benefit.

Adjustable death benefit

A universal life insurance policy may let you increase or decrease the death benefit if you need to, but you may be required to pay higher premiums if you do so. You can also decrease the death benefit, resulting in lower premiums. This would reduce the overall cost of the policy.

Tax-free legacy

The insurance payout your beneficiaries receive will be tax-free. Some policyholders incorporate permanent life insurance into their estate planning for this reason.

Growth within the policy is also tax-free; the interest that the cash value of your policy earns is non-taxable. However, if you withdraw the cash value of the policy or surrender the policy, you may face some tax liability.

The bottom line

Universal life insurance can be a good option for anyone looking for flexibility in their coverage. It’s particularly suitable for people whose income may vary since policyholders are not locked into fixed monthly payments and can occasionally rely on their policy’s cash value to pay premiums.

You can reduce or increase the death benefit if you need to and borrow from the policy’s cash value in case you need emergency funds. These benefits make universal life insurance a useful option for many policyholders. Speak to your insurance provider or a tax professional to learn more.

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