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Universal Life Insurance Plans Offer Greater Returns Than Basic Whole Life

By Mike Heuer

Unlike regular whole life insurance products charge premiums to grow cash value until the policy matures, a universal life policy offers investment options that come with some level of risk, as with any other type of investment. Depending on the type of insurance plan, the policies allow their policyholders to invest mutual funds, bonds and stock options and can have varying premium amounts based on the performance of the investment options chosen.

Because they can grow cash values at a greater rate then whole life plans, policyholders have the option of taking out loans against the accrued cash value or making withdrawals so long as the cash value is sufficient to cover the intended cash growth.

The variable variety of such life insurance policies are a type of permanent life insurance that provides a death benefit when the named insured dies. But the cash values have to be maintained to prevent the policy from lapsing if the investments do not grow and instead wind up losing money. When investments are doing well, premium amounts can be lowered for a period of time. But if too much money has been withdrawn, larger premiums must be paid to keep the policy in force and avoid possible insolvency.

Just like normal whole life plans, once the policy’s cash value equals the amount intended for the death benefit, then that policy has matured and no other premiums must be paid unless more loans are drawn against the cash value or withdrawals are made that cause it to fall below the maturity level. If all goes well and the investments grow at a greater rate than would occur with a typical whole life policy, the final death benefit would be larger than the face value sought for coverage. And that can create much larger financial benefit being paid upon death or reaching age 100.

And because of the investment options, the U.S. Securities and Exchange Commission has some authority over the insurance plans. By law, such plans only can be sold by insurance producers who have passed their respective state life insurance examinations and are fully approved for selling the life products with investment potential.

A big advantage of many universal life plans is the tax advantage they have over standard investments due to the fact they are insurance policies, so there is no federal income tax applied to benefits paid out and in most cases no state income taxes, either. The likely tax-free component makes it possible to give annual cash benefits to children for investment in their own vehicles, such as annuities or their own variable universal life plans. That enables them to take out loans against the cash value to help pay for their tuition, vehicles, make a down payment on a home and other purposes without facing a tax penalty.

Some of the insurance policies also provide a guaranteed death benefit after they are in force for a set number of years regardless of the cause of death, even if it is a suicide or other type of death that might be caused by an otherwise excluded peril, such as engaging in a high-risk activity, like mountain climbing or parachute jumping.