Is a Universal Life Insurance Policy Right for Me?
A universal life insurance policy is a type of permanent insurance that offers a high degree of flexibility in terms of how you pay for premiums and the amount of death benefit you can receive. This type of policy can be customized, but it comes with significant risks as well.
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Death Benefit Options
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You may choose between a level death benefit and an increasing death benefit. The level death benefit does not change for most of your life, and, in many cases, it will never change unless your cash value account grows to be a significant amount. The cash value of the policy accumulates "under" the death benefit, effectively replacing it. This has the effect of reducing the amount of insurance you are purchasing over time while keeping the death benefit itself the same. The increasing death benefit builds cash value "on top of" the death benefit. The cost of your death benefit never decreases. Instead, the cash value adds to your death benefit, causing the death benefit to increase over time.
Premium Payments
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Premium payments are flexible. You may choose the frequency of premium payments and whether you make premium payments at all. The insurance component is paid for by deducting the cost of insurance from the cash value account. The policy will remain in force as long as there is enough cash value in the account to pay for the insurance component.
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Investment Function
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A universal life insurance policy may invest in a variety of instruments. A fixed-interest account pays a fixed rate of return. Mutual funds may be used to enhance the policy's cash value or death benefit, but they do not guarantee performance and may cause you to lose some or all of your policy's cash value. Also, the policy's premiums may be invested in a proprietary equity-indexing function that tracks the upward movement of a chosen stock market index. Interest is credited based only on the upward movement of the market, while stock market losses are ignored.
Consideration
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A universal life insurance policy is appropriate for you if you are willing to take on the risks associated with the policy. These risks include the possibility of the policy lapsing as a result of insufficient cash value in the policy's contract and the risk of the insurer increasing the costs associated with providing the insurance component of the policy.
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