- 1. What is Universal Life Insurance, and How Does It Work?
- Answer: Universal life insurance is a type of permanent life insurance that combines a death benefit with a savings or investment component. Policyholders pay premiums, part of which covers the cost of insurance, and the remainder goes into a cash value account. The cash value can be invested, potentially earning interest or returns over time.
- 2. How Flexible Are Premium Payments with Universal Life Insurance?
- Answer: One of the key features of universal life insurance is its flexibility. Policyholders can typically adjust their premium payments and death benefit amounts within certain limits. This flexibility allows individuals to adapt their coverage to changing financial circumstances.
- 3. What Investment Options Are Available for the Cash Value Component?
- Answer: The investment options for the cash value component depend on the type of universal life insurance. In traditional universal life, the cash value is often tied to the insurer’s general account. In indexed universal life, it may be linked to a stock market index, and in variable universal life, policyholders can choose from a range of investment sub-accounts.
- 4. How Does the Cash Value Grow, and Is It Taxable?
- Answer: The cash value grows based on the performance of the underlying investments. The growth is typically tax-deferred, meaning policyholders don’t pay taxes on the earnings as long as the funds remain within the policy. Withdrawals up to the amount paid in premiums are generally tax-free, while loans against the cash value may have tax implications.
- 5. Can I Access the Cash Value During My Lifetime?
- Answer: Yes, policyholders can access the cash value during their lifetime. They may do so through withdrawals, policy loans, or surrenders. Keep in mind that accessing the cash value may reduce the death benefit and could have tax consequences.
- 6. What Happens If I Stop Paying Premiums?
- Answer: If you stop paying premiums, the policy may still be sustained using the cash value, depending on the amount accumulated. However, if the cash value is insufficient, the policy might lapse. It’s essential to understand the potential consequences and explore options such as reduced coverage or using the cash value to cover premiums temporarily.
