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What You Need to Know About Universal Life Insurance

Published: March 2015

You're planning ahead and thinking about life insurance — that's great. But, admittedly, you have a lot of choices. To help you start narrowing the field, here's a breakdown of the benefits of one option you may be considering: universal life insurance.

A couple looking at their universal life insurance.

What is Universal Life Insurance?

Universal life is one of three main types of permanent life insurance. Like all permanent life policies, universal life combines a savings component with a lifelong death benefit; as long as you pay the required premium, it can be in place as long as you live, says the Insurance Information Institute (III), even if you live into your hundreds.

What Are the Key Features of Universal Life Insurance?

Beyond lifelong protection, there are a few additional features of universal life:

You can withdraw money or borrow against it. When you pay your premium, a portion of each payment goes toward the death benefit, but a portion also goes to building up the policy's savings component (also known as the "cash value"). Over time, after money has accumulated, you can withdraw or borrow against the cash value of the policy for emergencies (the available amount will vary by company). However, it's important to know that this may cause a reduction in the policy's death benefit or create a tax implication for you to manage.

Your cash value earns interest. The cash value of a fixed universal life policy generally earns interest that's in line with current money market rates, says the III. Of course, the interest rate will fluctuate along with the market, which means the interest you receive may also go down, but some companies offer protection against that with a minimum performance guarantee on the policy.

You have flexibility with premiums. You have the ability to lower or even stop paying premiums on a universal life policy, the III says, as long as the cash value of your account can cover the costs. This can be helpful if money becomes tight. But there can be negative consequences, too, says the III. For instance, your coverage may end if you use up the account's cash value to pay for premiums.

You can adjust the death benefit. The flexibility of a universal life policy also extends to the death benefit. After a time, you may want to increase the amount that's paid out upon your death, which is something that many companies allow for as long as you pass a medical exam, says the III. Likewise, you might choose to reduce the death benefit, to reduce the cost of the policy.

Who Might Choose Universal Life Insurance?

The III offers some guidelines on how to decide whether permanent life insurance like universal life is right for you.

You seek lifelong protection. You might be a candidate for a permanent policy like universal life if you're looking for a long-term death benefit — maybe it's to leave your family with a nice, potentially tax-free, inheritance or to make a final charitable donation.

You have long-term savings goals. If you want to build tax-deferred savings and you don't expect to tap into the funds for a long time, you might also be a candidate for a permanent policy like universal life, the III says. That's because the cash value (which is what you can borrow against) takes a while to build up; keep in mind, though, that the amount available to you, and the point at which you can begin accessing the cash value, will vary by company.

Of course, there's more to consider before you answer the question of whether universal life insurance is right for you. That's why it can be a real benefit to talk with an agent who can review your personal situation and your life goals to help you decide.

Talk about the ins and outs of universal life insurance with a local agent.

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Life Insurance offered through Allstate Life Insurance Company, Northbrook, IL; Allstate Assurance Company, Northbrook, IL; Lincoln Benefit Life Company, Lincoln, NE and American Heritage Life Insurance Company, Jacksonville, FL. In New York, life insurance offered through Allstate Life Insurance Company of New York, Hauppauge, NY.

Loans or partial withdrawals can reduce the policy's cash value and death benefit, can increase the possibility of policy lapse, and may result in a tax liability. Consult a tax advisor for additional information on the tax treatment of loans or withdrawals from a life insurance policy.

Increases in benefits are subject to underwriting approval. Changes to benefits can have income tax consequences. Consult a tax advisor for additional information.

Increases to the death benefit require underwriter approval, which means the insured may need a new medical exam. Changes to the death benefit can also have income tax consequences. Consult a tax advisor for additional information.

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