What is Universal Life Insurance?
Universal life insurance is a type of permanent life insurance. Under the terms of the policy, the additional premium payments above the current cost of insurance is credited to the cash value of the policy.
The cash value is credited each month with interest, and the policy is debited each month by a cost of insurance charge and any other policy charges and fees which are drawn from the cash value, even if no premium payment is made that month.
What are the Living Benefits of Universal Life Insurance?
Many people use Universal Life Insurance as a source of benefits to the owner of the policy (as opposed to the death benefit which provides benefit to the beneficiary). These benefits include loans, withdrawals, collateral assignments, split dollar agreements, pension funding, and tax planning.
Most universal life policies come with an option to take a loan on certain values associated with the policy. These loans require interest payments which are paid to the insurance company.
Repayment of the loan principal is not required, but payment of the loan interest is. If the loan interest is not paid, it will be deducted from the cash value of the policy and if there is not sufficient value in the policy to cover interest, the policy will lapse.
If done within IRS Regulations, certain Universal Life policies can provide income that is tax-free. This is done through withdrawals that do not exceed the total premium payments made into the policy. Tax-free withdrawals can also be made through internal policy loans offered by the insurance company, against any additional cash value within the policy.
Collateral assignments will often be placed on life insurance to guarantee the loan upon the death of debtor. If a collateral assignment is placed on life insurance the assignee will receive any amount due to them before the beneficiary is paid. If there is more than one assignee, the assignees are paid based on date of the assignment, i.e. the earlier assignment date gets paid before the later assignment date.
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