If your financial circumstances tend to fluctuate, you can choose to pay either higher or lower premiums. Even if your economic circumstances are rock solid, you can opt to pay a lower premium when the market is performing poorly and up the premium when the market is bullish to make more of your interest crediting strategy.
Interest Strategy Choices:
You aren’t forced to blindly accept where the cash accumulation portion goes, because the insurance company will give you several strategy options. You may pick an equity index strategy, a guaranteed one year term deposit, or a general interest account based on current rates.
You get coverage for your entire life, as long as you keep up with the premiums.
Cash Value Availability:
As you increase the value of the policy over time, you might wonder what happens if you get jammed up financially. Will you have to cancel the policy to get the cash value? No, you can keep the policy in force and your family protected at the same time. You can borrow or even withdraw the cash value you have built up to date and retain not only the unused portion of the cash value but the availability of death benefits.
The Flexibility of the Universal Life Cash Value Feature:
Now let’s cover the cash value aspect of universal life insurance in more detail, because its flexibility is a big advantage. Say your minimum premium is $50 per month. You can send in $50 every month for your whole life and you’ll have your coverage, or you might decide to send in $100. The first $50 goes to paying your insurance costs: cost of insurance, premium fee, administration fee, etc. The other $50 bucks goes into your cash value account.
The cash value account works similarly to a Roth IRA. The idea is to stuff it full of cash and let it accumulate in the early years, so you can pay lower premiums or no premiums in the later policy years. If you’re 20, you might be thinking, “Look, I don’t want to be paying these premiums when I’m 80 years old.”
You don’t have to. What you do is send in additional premiums which earn interest and grow tax deferred in your cash value account. Eventually, you’ll have enough cash in your policy, that at some point you can stop making premium payments. The insurance company will then take the cost of insurance out of your cash value, and as long as there are sufficient funds, you no longer have to make premium payments.
What some people do is take overfunding to the extreme and send in 4-5 times the minimum premium. They do this because of the growth potential and tax advantages of life insurance contracts.
Both the cash value investment portion and the death benefits are tax deferred which means the IRS will not bother you when there is a payout. Just remember, if you borrow against the cash accumulation account you have to take the funds as a loan to enjoy this benefit, which means you will incur interest.
Premiums Are Covered:
If you are financially strapped and can’t make the premium, the insurance company will pay the amount of the premium from the accumulated cash value which may be very convenient.
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