Insurance generally is one of those items that you buy but hope that you'll never need. Life insurance, however, can be a useful asset that can offer additional income potential along with tax benefits. It also generally pays a tax-free death benefit to your beneficiary upon your death along with the potential for tax-deferred growth of cash values. Life insurance is purchased subject to underwriting approval.
Evolution of Life Insurance
On a fundamental level, life insurance policies are simply contracts between an insurer and an insured to provide a death benefit in exchange for payment of premiums. Many individuals receive term life insurance as a benefit from their employers, although coverage usually ends with employment.
On the other hand, whole life policies, as the name suggests, provide coverage over your entire lifetime. Importantly, whole life policies also contain additional features such as a build-up of cash value, the ability to take out loans, and even participation in the earnings of the policy, even though the insurance company manages the investments. Insurers also set premiums payments based on long-term interest rate forecasts and actuarial assumptions about how long the premiums will be paid.
In 1978, during an era of high and rising interest rates, a variation on the whole life theme appeared in the form of universal life insurance. With a universal life policy, the insured is able to set the premium and the death benefit, allowing the establishment of a permanent policy with more premium payment flexibility than a whole life policy.
Additionally, interest paid on universal life policies is often adjusted on a monthly basis, while interest on a whole life policy is generally adjusted annually.
"Traditional universal life policies are great for a rising interest rate environment, but they can be less than ideal when rates are falling, says Richard Forcht, a Financial Planner with Lincoln Financial Advisors in Plano, Texas. That is because universal life insurance illustrated performance is based on specific assumptions and is never a guarantee or a predictor of future results. "Maybe a more attractive option for many individuals is the variable universal life policy.
Variable Universal Life is most appealing to a wide range of customers who are interested in the dynamics of death benefit protection and potential cash value growth through a choice of high quality investment options (sub-accounts). Variable life insurance has features of both traditional insurance products and securities. The distinction between variable universal life policies (VULs) and traditional universal policies lies in your ability to select and manage policy investments, or "sub-accounts. These sub-accounts, which can range from basic stock, bond and money market accounts to well-known mutual funds from popular investment providers, have tax-deferred growth potential over time and may also generate tax-free income for beneficiaries.
The Big Idea: Tax Deferral
As you pay premiums and make investments with a VUL policy, you can potentially build up cash value in the policy, which can be used for a number of purposes. In fact, the major lifetime financial benefits of universal life and whole life policies are in the tax treatment of withdrawals and loans from cash accumulation values. Withdrawals from cash values reduce the death benefit and may be subject to surrender charges.
Variable universal life insurance involves investment risks, including possible loss of principal. Before investing, investors should carefully consider the investment objectives, risks, charges and expenses of the variable universal life insurance product and its underlying investment options. The current policy prospectus and underlying fund prospectuses, which are contained in the same document, provide this and other important information. Please read the prospectuses carefully before purchasing a variable universal life insurance policy.
Loans and withdrawals generally provide tax-free access to funds that may be used for any purpose but reduce the death benefit. No taxes are paid on cash withdrawals up to the extent that premiums are paid, and loanswhich are not taxed as long as the policy remains in forcecan be paid back out of the death benefit (which will be reduced for principal and interest outstanding). This assumes the policy is not a Modified Endowment Contract where cash values exceed a multiplier of the policy's death benefit.
Talk to Your Financial Planner About:
" What type of life insurance may be appropriate for you.
" The tax benefits of life insurance.
