When you pass away, you want to leave behind some financial benefit to help take care of the loved ones that depend on your income. That’s the benefit of purchasing life insurance. Life insurance pays a death benefit to the person(s) you name as the policy’s beneficiary.
Basic Types of Life Insurance
There are two basic types of life insurance – term and permanent. Term life insurance pays the benefit only if you pass away within a specific time frame, or term. While your insurance premium can remain the same within the term, if you renew your policy after it expires, your premium will go up.
Permanent life insurance is available forever and your monthly premiums are the same as long as you keep the insurance. With permanent life insurance, part of your monthly premium pays the cost of insurance. The other part is invested into a tax-deferred investment account and used to build the cash value of the policy.
Types of Permanent Life Insurance
Then, there are two basic types of permanent life insurance – whole and universal. Whole life insurance is the stricter of the two types of permanent life insurance with level payments throughout the policy. On the other hand universal life insurance is more flexible in premium payments and death benefit amounts.
How Universal Life Insurance Works
With a universal life insurance policy, you can typically pay your premiums at any time and in any amount, after you’ve made your first premium payment. Before you choose to reduce or stop making insurance premiums payments, you should have enough cash value in your policy to cover the premium. Otherwise, the insurance company may cancel your policy. You also have the ability to increase or decrease the amount of your death benefit as your beneficiary’s dependence on your income changes.
Unlike whole life insurance, you don’t have to pay your insurance premium on a universal life insurance policy up until your expiration. After a certain number of years, you may have accumulated enough cash value in your policy to cover the death benefit and the remainder of the premium payments.
Most insurance agencies guarantee a minimum return on the cash value of your policy. The typical minimum return is 4%. No matter how the insurance’s investments gain or lose, you will always earn at least that amount.
With universal life insurance you have two options for death benefits. First, the death benefit may be paid from the cash value of the policy. Or, the policy might pay the contract value of the policy in addition to the cash value you’ve accumulated. The second option typically costs more.
Universal Life Insurance and Estate Planning
A lot of financial advice will steer you away from universal life insurance policies because they cost more than comparable term life insurance. But, people with several millions of dollars in assets can benefit from a universal life insurance policy. When you pass away, your estate will probably be inherited by one of your family members, like your child. If your estate is worth more than $3.5 million, every dollar over the threshold will be taxed at 45%. So, for example, if your estate is worth $4.5 million, your beneficiaries would be responsible for paying $450,000 in estate taxes. If your estate doesn’t have that much in liquid assets, one of the assets will have to be sold to cover the taxes.
A universal life insurance policy can allow you to accumulate enough cash to cover the estate taxes and leave your loved ones with income to live on. This will eliminate the need to liquidate assets to pay for costly estate taxes.
Since the laws of estate taxes are complex, it’s important that you speak with an estate planning professional like an accountant or attorney. Since insurance agents earn commission when you purchase a universal life insurance policy, you may not get the best advice from them. To learn about what type of life insurance coverage you need to protect your estate, it’s best to speak with an unbiased party who has nothing to gain from your decision.
Universal Life Insurance Quote
You can get a universal life insurance quotes via the many resources available online. This is not only a great way to get a feel for how much you’ll have to pay, but you can also compare universal life quotes from several top insurers. Universal life can have many hidden fees and costs. Make sure you have a good understanding of your UL policy before purchasing. You’ll also want to choose a solid insurer, that’s rated “A” or better. This will provide you with the peace of mind necessary when making a significant investment.