Universal Life offers you a flexible premium option. You may have the option to increase or decrease your premium payment amount or skip premium payments altogether. If there is enough cash value to fund your policy, you may choose to change your payment amounts or your payment schedule.
Although this flexibility can be beneficial, it means the policy must be closely monitored to ensure proper funding. Your policy could lapse if there is not enough cash value to support the policy. Also, there may be a tax liability if the cash value exceeds legislated guidelines. If the maximum amount allowed within a policy is exceeded, the excess amount is moved to an account outside the policy called a side account. When managing a universal life policy, you should consider your objectives for setting it up in the first place, whether that may be for wealth transfer, covering a final tax liability, or leaving a legacy.
Each month, the cost of insurance is deducted from the policy’s cash value — the remaining amount stays in the policy’s investment account. This cash value provides tax-sheltered growth, but its value is not usually guaranteed and can fluctuate along with the market. The policyholder may have the option to borrow against or withdraw the cash value. There are, however, risks to consider, so before making any changes, the policyholder should consult with a life insurance licensed advisor. For example, withdrawing cash value from a policy could result in it lapsing or terminating.
If the policy coverage is terminated or surrendered at the request of the policyholder, the policyholder is paid any cash surrender value, which is calculated as the cash value less any applicable surrender charges.
