Understanding Universal Life Insurance

Life insurance is an insurance product that most people prefer not to think about, but understanding universal life insurance can help you better provide financial security for your  family. In general, life insurance is a form of coverage that provides a payout to your family or beneficiary in the case of your death. Most people buy life insurance because it provides peace of mind knowing that their family wil have an income if they died unexpectedly. Since there are more than one kind of life insurance, it's important to determine what kind of life insurance coverage will best serve you and your family.

What is Universal Life?

Unlike other types of life insurance, universal life is a cash-value policy. The insured sets an amount for the policy and then any payments above the basic cost of the insurance becomes an additional value to the policy payout. The excess payment can be invested in mutual funds or other interest-bearing accounts to more quickly grow the cash value.

Benefits of Universal Life

The main benefit of universal life insurance is its flexibility. Unlike other forms of life insurance, the benefit that is paid at death can be adjusted without having to issue a new policy. As well, the payment amount is more flexible. For those who need life insurance but don't have a lot of money to pay on premiums, universal life can be a good way to start building value when you are young.

Disadvantages of Universal Life

While in many ways universal life insurance is more flexible than other life insurance choices, it can be more restrictive when it comes to guaranteed payouts. In other life insurance policies, a missed payment would not result in nonpayment of the death benefit, but with universal life, if the payments you are making aren't enough to cover the cost of the insurance policy or you miss a payment, the death benefit can be revoked.

Tax Advantages of Universal Life

The biggest advantage of universal life insurance is its tax benefits. The premium you pay for the insurance builds value rather quickly in the beginning, and the cash value of the policy is not taxable unless you withdraw it before you die.  If, however, you allow the policy to mature and be paid as a death benefit, the money invested in the policy remains untaxed, making it great way to reduce your taxable income.

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