Imagine a bucket with an inlet and an outlet. The premium of a life insurance policy acts as water coming in through the inlet. The insurance company takes away some of it in the form of cost of insurance and other overhead costs and pours out some in the form of interest. This interplay between the premiums paid and the interests earned on the cash value forms your bucket of universal life insurance. In this article, we will discuss Universal Life policies and basics.
Working of a Universal Life Insurance Policy
- The policy holder chooses a guaranteed death benefit of a specified amount that will be received by their beneficiaries after their death.
- The premiums are deposited into a ‘policy fund’. Any amount paid over and above the amount required to keep the policy alive is either invested in various financial instruments like mutual funds, securities etc. (Deferred growth) or used to enhance the cash value of your policy.
- The premiums are flexible; you can decide the payment schedule of your premiums. (For e.g. either monthly, quarterly or annually)
- After the end of every period as decided by the policy holder, the cost of insurance of the policy and any other added expenses are deducted from the total value of the account.
- The interest accrued is credited to the policy account; the amount of interest may change with different circumstances, but it will never fall less than the amount stipulated in the contract at the initiation of the policy.
Advantages of a Universal Life Policy
- If premium payment is ensured and continued, protection of life is secured.
- The cash value that accumulates and grows over a period of time is tax deferred. Any loan or drawings done against it are tax free; the amount thus obtained can even be used to pay future premiums.
- The policy holder can easily opt for surrender of the policy against the cash value.
Hopefully this brief read comes in handy the next time someone asks you about Universal Life policies and basics. For more info you can also Visit Here!