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Is indexed universal life insurance right for you?

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Life insurance can be a practical way of making sure that your loved ones are taken care of even after you’re gone. However, there’s more than one type of life insurance policy, and some can provide you with more features than just a death benefit. If you’re looking for life insurance that also builds a cash value, you may be interested in indexed universal life insurance.

Term vs. Permanent Life Insurance

If you’re overwhelmed by the number of types of life insurance, it’s helpful to start by considering the differences between permanent life insurance and term life insurance, which are two of the most basic forms of life insurance.

  • Term life insurance covers a predetermined period of time. This time period is generally five, 10 or 20 years. If the insured dies during the predetermined term, the life insurance policy will pay a death benefit to the beneficiary. The policy expires once the term is complete unless the policyholder takes action to renew coverage or to convert the policy to permanent life insurance coverage. As with all types of insurance, the policyholder also needs to keep up with premium payments to maintain coverage. If the insured dies after the policy has expired, it pays no benefit.
  • Permanent life insurance does not have a predetermined end date. This form of coverage will lapse if the policyholder does not pay premiums or decides to cancel coverage. Otherwise, coverage will last for the remainder of the insured’s life. In addition to paying a death benefit to the beneficiaries, permanent life insurance can build a cash value that the policyholder can access during their lifetime.

Both term and permanent life insurance have their pros and cons. Some people are attracted to permanent life insurance due to the cash value accumulation and the fact that it never expires. If you’re looking for lifelong coverage that also has an investment component, permanent life insurance may be a good fit.

However, term life insurance may be significantly less expensive, making it an affordable option for adults who only need coverage for a limited period of time. For example, new parents may want 20-year term life insurance to provide coverage until their child is a legal adult, while a breadwinner who just purchased a house may want a policy that covers the length of their mortgage.

Universal vs. Whole Life Insurance

If you’re interested in permanent life insurance, the next decision is choosing the specific kind of permanent life insurance policy. Two common options are universal life insurance and whole life insurance. Since both are permanent life insurance policies, they provide lifelong coverage and build a cash value that the policyholder can access during their lifetime. Despite these similarities, there are some important differences.

  • Whole life insurance provides predetermined payments and interest rates. It tends to be more expensive than universal life insurance, but it can also be more reliable. If you’re looking for a more predictable life insurance option, whole life insurance may be the better choice.
  • Universal life insurance provides variable interest rates. With a universal life insurance policy, it’s possible to adjust the premium amount and the size of the death benefit (to a certain extent). Universal life insurance tends to be less expensive than whole life insurance and may provide a good return if the investments do well, but this comes at the risk of the investments performing poorly. If this happens, your coverage could be at risk if the policy becomes underfunded, and you may have to pay higher premiums to keep your policy from lapsing. If you’re looking for a more flexible permanent life insurance option, universal life insurance may be the better choice.

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Indexed Universal Life Insurance Policies

If you like the flexibility of universal life insurance but want greater stability, you might be interested in an indexed life insurance policy.

The investments in an indexed life insurance policy are tied to an index, such as the S&P 500. This is unlike a variable universal life insurance policy, in which the investments are tied to subaccounts with different assets that require more management and have a greater risk of fluctuation. In fact, with an indexed universal life insurance policy, it may be possible to put some of the cash value in a fixed-rate account and some in an indexed account to help create even more stability.

However, one of the downsides to indexed universal life insurance is that your investment returns may be capped. But, an upside is that some interest may be guaranteed.

How to Access the Cash Value of Universal Life Insurance

There are a few ways to access the cash value of your universal life insurance policy:

  • Cancel your policy and claim the cash value. This is called surrendering your life insurance policy. If you go this route, some fees may be deducted, but you will receive some of the cash value. Before taking this action, make sure to consult with your insurance broker to go over your insurance needs and ensure that you don’t need this coverage anymore. Also, it may be wise to consider if selling your life insurance policy to a third party could provide a better cash settlement. The amount you receive in a life settlement may be significantly larger than the amount you would get from surrendering your policy.
  • Borrow from your policy. You can borrow from your policy once it has built a cash value. The amount you can borrow is often restricted to 90 percent of the current cash value, and you may have to wait a certain number of years before you can borrow from a new policy. Some potential advantages to borrowing include not paying income tax or going through a credit check and generally low interest rates. However, if you don’t pay the loan back, the loan and interest will be subtracted from your policy, which could reduce the death benefit or cause the policy to lapse.
  • Withdraw from your policy. An alternative to taking out a loan from your life insurance policy may be to make a withdrawal that you will not pay back. The money you withdraw is typically not subject to income tax, but only up to the amount that you’ve paid in premiums. If you exceed that amount, you may owe taxes. Withdrawing may be a good option if you need cash but still want to keep your policy, but it’s important to be aware that it may reduce the death benefit. Also, if your policy becomes underfunded, you will have to pay higher premiums to keep it from lapsing.

Paying Your Universal Life Insurance Premiums

As with other types of insurance policies, you must pay premiums to maintain coverage. However, you have some flexibility with your premium payments. For example, if your indexed universal life policy has accrued a cash value, you may be able to use the cash value growth to pay your premiums or to pay additional premiums in order to maximize the investment features.

Do you need help with universal life insurance?

Universal life insurance can offer many attractive features like the cash value component, but it can also be complicated without the right help. An experienced life insurance broker can help you understand your options if you’re thinking about buying a policy or if you already have a policy in place and want to access the cash value.

No matter what form of life insurance you’re looking for, Higginbotham can help you navigate the complicated process of life insurance. Connect with one of our life insurance specialists to learn more.

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