Universal Life Insurance Explained

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Universal life is one type of permanent life insurance policy available to consumers. Universal life is sometimes referred to as flexible-premium life because the policyholder is not locked into a rigid premium schedule as with other plans, such as whole life.


A key feature of universal life is the flexibility it allows in premium payments and death benefits. The policyholder can make payments in any amount after the initial premium is paid, and any amount that exceeds what is needed to pay for the insurance costs will go into an interest-bearing account. The insured can also adjust the death benefits as his needs change over time.


The cash portion of the policy earns tax-deferred interest, meaning that no taxes are paid on the accumulated amount until it is withdrawn from the policy. This can make it a viable investment option for someone who is looking to avoid having to pay taxes on investment income.


Although a universal life policy earns tax-deferred interest, the rate of return is relatively low. According to the Financial Web website, a typical return rate is 4 to 6 percent. And because the rate can fluctuate, this type of policy can require frequent management by the policyholder.