11225 N. 28th Dr. Ste-D
Phoenix, AZ 85029
Mountain Valley Insurance
4672 Maverick Ln.
Lakeside, AZ 85929
Universal life insurance is one of the two main varieties of permanent life insurance. Unlike term life insurance, a universal policy can be maintained indefinitely. What's the difference between universal life insurance and whole life insurance (the other variety of permanent insurance)? Whole life insurance is characterized by its uncompromising guarantees; universal life insurance is characterized by its flexibility, transparency, and affordability. Universal life insurance is another example of cash value life insurance. "Cash value" is an interest-bearing account of real money. It's primary role is equity for your policy—at any time, the policy owner can cash in his/her policy and walk away with its cash value.
The death benefit, premiums, and cash value are perpetually adjustable in the hands of the policyholder. In capable hands, that makes universal life insurance a more useful investment vehicle.
With other types of life insurance, you pay a certain, required premium, and you never see what the insurance companies do with the money. With universal insurance, though, there is no required premium—you pay whenever you want, however much you want. How does the insurer take its fee, then? Instead of requiring periodic payments from you, it makes periodic charges against your cash value account—a charge for administration, a charge for cost of insurance, a charge for loading, etc. You see just what expenses your policy is incurring. Understanding your policy's expenses is useful because universal insurance's flexibility permits you to make changes that will change the costs of your coverage.
It's true that universal life insurance is not nearly as cheap as term life insurance, but it is much cheaper than whole life insurance. How can it be cheaper and grant the policyholder so much more freedom at the same time? In the real world, "freedom" equates to "responsibility," and it is by transferring responsibility from the insurance company to the policy owner that universal life insurance cuts costs. Whole life insurance guarantees a fixed rate of cash value growth and a fixed death benefit. By altering or discarding these guarantees, life insurance companies can reduce the cost of the life insurance product.
Indexed Universal Life
Universal life insurance (UL) comes in a lot of different flavors, from fixed rate models to the variable ones, where you select various equity accounts to invest in. Indexed universal life (IUL) allows the owner to allocate cash value amounts to either a fixed account or an equity index account. Policies offer a variety of well-known indexes such as the S&P 500 or the Nasdaq 100. IUL policies are more volatile than fixed ULs, but less risky than variable universal life policies because no money is actually invested in equity positions.
IUL policies offer tax-deferred cash accumulation for retirement while maintaining a death benefit. People who need permanent life insurance protection but wish to take advantage of possible cash accumulation via an equity index might use IULs as key-person insurance for business owners, premium financing plans or estate-planning vehicles. IULs are considered advanced life insurance products in that they can be difficult to adequately explain and understand. They are generally reserved for sophisticated buyers.
When a premium is paid, a portion pays for annual renewable term insurance based on the life of the insured. Any fees are paid, and the rest is added to the cash value. The total amount of cash value is credited with interest based on increases in an equity index (but it is NOT directly invested in the stock market). Some policies allow the policyholder to select multiple indexes. IULs usually offer a guaranteed minimum fixed interest rate and a choice of indexes. Policyholders can decide the percentage allocated to the fixed and indexed accounts.
The value of the selected index is recorded at the beginning of the month and compared to the value at the end of the month. If the index increases during the month, the interest is added to the cash value. The index gains are credited back to the policy either on a monthly or annual basis. For example, if the index gained 6% from the beginning of June to the end of June, the 6% is multiplied by the cash value. The resulting interest is added to the cash value. Some policies calculate the index gains as the sum of the changes for the period. Other policies take an average of the daily gains for a month. If the index goes down instead of up, then the interest goes down to zero or the company may have a "true-up" feature where they credit up to 2% on the indexed strategy. This way, you will never participate in the losses of an index, only the gains.
The gains from the index are credited to the policy based on a percentage rate, referred to as the "participation rate". The rate is set by the insurance company. It can be anywhere from 25% to more than 100%. For example, if the gain is 6%, the participation rate is 50% and the current cash value total is $10,000, $300 is added to the cash value [(6% x 50%) x $10,000 = $300]. IUL policies typically credit the index interest to cash accumulations either once a year or once every five years.
Tax Free Retirement Strategy
IULs can be utilized to create a more tax-free retirement. Since the premiums are paid with after-tax dollars, that portion of the accumulated cash value won't be subject to taxes upon surrender or withdrawl. Any interest earnings will be taxed, but the distributions taken from an IUL aren't viewed by the IRS as provisional income. This allows you to get the maximum anount of your entitled Social Security benefit that you worked so hard for. Unlike a ROTH IRA, there are no contribution limits on an IUL and you can take distributions whenever you like before the age of 59 1/2.
Universal Life Insurance
Independent Insurance Agency serving Arizona for over 30 years.
2410 E. Route 66
Flagstaff, AZ 86004
355 Main St.
Camp Verde, AZ 86322
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