Universal life insurance is a permanent insurance policy that provides the insured with flexibility to customize coverage and premiums to meet their specific needs. Since it incorporates both a death benefit and a method of saving, a Universal Life policy is essentially a combination of a term life insurance policy and a tax-deferred interest accumulating savings account. This type of insurance is often offered as a work place benefit from employers, whether it is based upon employee class, incremental amounts or flat amounts.
Universal Life insurance is best suited for those individuals who feel that they need life insurance when they are age 70 and beyond. This allows the savings portion of these types of policies to increase into an investment. Individuals who have a Universal Life policy pay a premium for their entire life, which can generally be paid on a monthly or annual basis. Each premium is added to the insured’s account value, and the cost of insurance for the policy and any applicable riders is deducted each month. Riders might include such coverage as level term coverage for the insured’s spouse. Interest is credited to the insured’s account value, and the total cash value grows tax-deferred.
The insured can usually select from one of two death benefit options with a Universal Life policy. The first benefit provides a level death benefit that is equivalent to the basic amount of life insurance selected by the insured. The second benefit provides a death benefit that is variable based on the insured’s policy account value. Therefore, in this case, the death benefit is the total of the life insurance and the policy account value. Regardless of the type and size of the death benefit, the benefit usually passes to the insured’s beneficiaries on an income tax-free basis.