Universal life insurance is a unique product that combines permanent life insurance coverage with options for investment that offer tax-advantaged savings. It’s an excellent tax-efficient product to help you build an estate and pass your assets to your beneficiaries.
How does universal life insurance work?
Universal life, first and foremost, is an insurance policy. You decide the amount of insurance you need to protect your family, assets, or your business in the event of your death. Like other types of life insurance, the premium and cost of insurance is calculated based on your age, health, and other risk factors.
In addition to the insurance protection offered with universal life, your premiums are invested and have the potential to generate tax-advantaged growth. With this product, you get to choose the investment options within your policy.
With each premium payment you make, the insurance company deducts the required premium taxes. The rest of your premium payment is deposited into investment interest accounts, which you select when you apply for the policy. Each month, the insurance company deducts charges for the cost of insurance, administration fees, and charges for any additional riders.
The amount that is left over makes up the investment portion of your policy, which is also known as the account value. Any money that remains in your investment interest accounts earns interest and fluctuates based on the performance of your investments.
A universal life insurance policy is most effective when you pay more than the amount needed to cover the costs of your policy. You are limited in the amount of premium you can pay each year and maintain a tax-exempt status on your policy. This is known as the maximum exempt premium (MEP). Any premiums you pay over the MEP are deposited into a separate account held outside of the policy, referred to as the shuttle account. Any growth on investments in the shuttle account is taxable.
Because it is an insurance policy, when you die, the death benefit is paid to your beneficiary.
Get the advice you need – talk with your advisor today
With different options for saving and paying premiums, universal life is a complex product that requires the skilled advice of a professional financial advisor. Talk to your advisor about whether universal life is right for your financial portfolio.