When it comes to shopping for permanent life insurance, you have several options to consider. One popular choice is Universal Life (UL) insurance. Let’s delve into what makes Universal Life insurance unique and how it might fit into your financial planning.
What is Universal Life Insurance?
Universal Life insurance is designed with flexibility in mind, allowing policyholders to adjust both their premiums and coverage amounts over time. This flexibility means you can increase or decrease the amount you pay, known as your “planned premium,” based on your financial situation and needs.
How Does It Work?
When you pay your planned premium, it is divided into two parts. The first part covers the cost of the death benefit and administrative costs. The remaining funds are placed into the policy’s account value, where they earn interest. This interest-earning component is a key feature of Universal Life insurance, as it can help grow the policy’s cash value over time.
Initial Premium Requirements
At the outset, a minimum required premium must be paid to activate the coverage. Initially, your planned premium typically covers the full cost of insurance and administrative fees, with any extra funds contributing to the policy’s cash value.
Increasing Costs Over Time
As you age, the cost of insurance increases. There may come a point when your planned premium is insufficient to cover the death benefit, administrative costs, and maintain the account value. When this happens, the additional premium needed to keep the policy active will be deducted from the policy’s cash value.
Impact of Interest Rates
When you first purchase your policy, you may set your planned premium based on the interest rates at that time. If current interest rates are lower than when you first purchased the policy, the cash value accumulation might not meet your initial expectations. This could lead to a depletion of the cash value if adjustments aren’t made.
Options to Keep Your Policy in Force
To ensure your policy remains in force, you might need to consider either increasing your premium or decreasing your death benefit, provided your policy allows for such adjustments. Relying solely on the cash value to cover the difference can result in your policy lapsing when the cash value is exhausted.
Annual Review and Statements
It is imperative that you review your policy annually. Insurance companies send out an annual statement detailing your current cash value and indicating whether your premium payments are sufficient to maintain the policy. If you have any questions about your statement, contact your insurance company or agent for clarification.
Seek Professional Advice
Understanding the intricacies of Universal Life insurance can be challenging. By understanding how Universal Life insurance works and regularly reviewing your policy, you can make informed decisions that help you reach your long-term financial goals.
If you’re interested in learning more about Universal Life insurance and how it might benefit you, consider reaching out to RoseMark Advisors, the financial planning division of AMAC. We can provide personalized advice and help you navigate your options. Give us a call at 888-730-6565.
This article was written by Ashley Morrone.