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How Universal Life Insurance Works

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Shuman Roy is an entrepreneur, business owner, and musician. He started RoysNoys, LLC in 2013 as a music production and education service company. He also offers small business consulting and advisory services to help businesses get from start-up mode to turn-key operations. Shuman earned his M.B.A from the Stern School of Business in 2001...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency...

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Reviewed byJoel Ohman
Founder, CFP®

UPDATED: Mar 13, 2020

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new life

When it comes to life insurance, there are multiple options available to us as consumers.

The two that are probably the most utilized and easily understood include term life insurance and whole life insurance.

For comparison sake, term life insurance most closely resembles a property and casualty policy (car or home for example) in that it is insurance for a specific period of time, maybe 10 or 20 years.

And like those lines of insurance, there is a chance the insurance company will not have to pay out a claim, or death benefit in the case of life insurance.

The difference might be that the premium payments don’t change over time on the term life policy, while auto and home can fluctuate quite a bit.

Then we have whole life insurance (picture your grandparent’s life insurance policy), which remains in force for the duration of the insured’s life and gains cash value over time as the premium dollars accumulate.

You may be able to take a loan out against the cash value built up in the policy.

With whole life, unless you fail to make your premium payments, and your policy subsequently cancels, you are guaranteed a death benefit upon your departure.

So where does universal life insurance fit in?

Theoretically, universal life insurance combines the best of both the term and whole life insurance policies.

This includes both term life protection (from a benefit standpoint) and the investment of accumulated funds found in the whole life policy.

Did we mention the funds applied to the investment potion of the policy are tax-deferred?

Picture a 401k-type account. You can expect to earn interest on the invested money at a rate similar to money market rates, which while not making you rich, is a good way to build tax-deferred income.

Benefits of Universal Life Insurance

“Flexibility” is the term most closely associated with the universal life insurance policy.

And so you may be wondering exactly what options can be included?

Coverage: You are able to change the amount of coverage, known as the death benefit. Perhaps your college student graduates and gets a high-paying job.

You may want to decrease the death benefit as your concerns about his or her financial future lessen, or on the flip side, you may decide to have another child and increase the benefit as a result.

Premium: It is possible to change the insurance premium (to a degree) as your financial situation fluctuates…a recession for example.

Savings: The amount of money you choose to allocate to savings can be adjusted as well.

For example, you may decide now is a bad time to invest and put more money toward the premium payment.

Life insurance can be complicated, but too important to ignore.

There are a lot of options out there, so be sure to get insurance quotes online and visit an independent insurance agent to help guide your decision to purchase.

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