Universal Life Insurance – Pros and Cons


Universal life insurance is a kind of permanent life insurance and builds cash value over its lifetime. This cash value is credited each month and the interest rate is either linked to a financial index or is determined by the insurer. There are many advantages as well as drawbacks of these types of policies; However the benefits also depend on various factors such as the type of premiums that you opt for.

These policies are modified version of whole life insurance policies and are similar to them. The largest benefit of universal policies is that there is a tax advantage associated with them and the cash value builds up tax-deferred and is tax exempt in the case of death of the insured person.

Furthermore such type of insurance in addition has the advantage of better elasticity of premiums in contrast to those in a whole life insurance policy. One more benefit of a universal life insurance policy is that the death benefit is capable of being augmented or reduced without surrendering the policy which is the same as with whole life insurance policies.

Many universal policies can be financed with a loan which is provided by the insurer. The interest rate on the loan is to be repaid and the principle is not; However if the interest is not repaid then it can be deducted from the cash value. If there are not enough funds in the cash value then the policy will inevitably terminate or lapse. Therefore it is important that you pay the interest on the loan promptly to avoid any pecuniary losses.

Another option instead of taking out a loan is to take out a withdrawal but this will nullify any tax advantage that you would have had if you had taken out a loan. The withdrawal is considered as a material transaction and will convert the policy into a Modified Endowment Contract (MED) and consequentially the tax deferral or advantage will cease to exist.

There are three basic types of universal life policies – fixed premium policies, flexible premium ones, and single premium policies. The matter of choosing among these depends on the consumer's financial condition and future financial aspects. For instance a fixed premium policy is one in which the premiums are to be paid for only a fixed period of time whereas in a single premium policy the premium is paid only once. Lastly, flexible premium policies are those that are the essence of universal life policies but the flexibility is only allowed within a certain limit.

Source by Ashish Nayyar