Universal life insurance offers a unique blend of life insurance protection and a cash value component, which can be an effective way to achieve long-term financial goals. Understanding how the cash value works and how to maximize it will make this type of policy a valuable asset in your portfolio.
Below are the key aspects of building cash value through universal life insurance.
Cash Value in Universal Life Insurance
Cash value is a feature that sets universal life insurance apart from term life insurance. With each premium payment you make, a portion goes toward the life insurance policy cost, while the remainder is allocated to the cash value account. This account accrues interest over time at a rate determined by the insurance company, and its growth may vary depending on the specific universal life insurance policy chosen.
Paying Flexible Premiums
A significant advantage of universal life insurance is its flexible premium structure. Policyholders can choose to pay more than the required premium, and the excess amount directly contributes to the cash value. This flexibility allows policyholders to grow their cash value faster if they can contribute surplus funds.
Conversely, during times of financial difficulty, policyholders may reduce their premium payments or even rely on the accumulated cash value to cover the cost of insurance. However, it’s essential to consistently monitor the policy to ensure the cash value does not become depleted, which could cause the policy to lapse.
Leveraging Interest Rates
Universal life insurance policies typically offer a minimum interest rate guarantee, which provides a level of security for the policy cash value. Some policies are tied to market indexes, potentially offering higher returns under favorable economic conditions. By selecting the right policy and staying informed about interest rate trends, policyholders can optimize the growth of their cash value over time.
Withdrawing or Borrowing Against Cash Value
The cash value in universal life insurance can be accessed through withdrawals or loans. Withdrawals can provide funds for significant expenses like education or home improvements, though they may reduce the death benefit. Loans against the cash value are another option, often featuring lower interest rates compared to traditional loans. However, unpaid loans may also reduce the death benefit.
Regularly Reviewing Your Policy
To maximize the cash value component, policyholders should periodically review their universal life insurance policy. Life circumstances and financial needs can change, impacting the contributions or strategy for building cash value. Working with an insurance advisor can help ensure the policy stays aligned with long-term goals.