A variable life insurance policy is one that serves two purposes. First, the premium goes toward the policy that will be paid out upon death. Next, part of the premium goes toward the cash value of the policy. This amount is used to invest in portfolios that are similar to mutual funds. The amount of money that is earned toward the cash value is not taxed as long as the earnings are not withdrawn.
The Positive Side of Universal Life Policies
There are some advantages to buying universal life policies. If the purpose of the policy is to secure the financial future of your family in case of your death then this is a definite advantage. The policy is paid out on your death and can be used for funeral expenses and living for those who survive you to ensure they are not in a financial bind when without your additional income. Another advantage is the ability to invest without having earnings taxed. However, if you need that investment and it is taken out early the option is not nearly as lucrative.
When not to Buy Universal Life Policies
If you are using a universal life policy as a means to invest in a retirement account or a tax sheltered investment account, the benefits are not as great. The possibility that you may withdraw the money at some point in time reduces the benefit. Once the money is withdrawn you will need to pay taxes on it. In addition, there may be fees assessed that make the return even less lucrative. With the additional fees and terms you may find that it can take up to five years before the policy is worth more than the premiums you put into it.
Insurance and Investments
When considering universal life you need to determine the goals of the policy. It may be more beneficial to go with a straight insurance policy. It will likely be cheaper. You can then take the savings and invest it into other options. You can choose from a variety of investment types from conservative to higher risk and higher yield. When you diversify your investments you will have a more secure return on your investment. Before buying into the ideal of a universal life policy, you should explore other options to see if they may be more lucrative for you.
There are times when a universal life insurance policy can benefit you greatly. However, it is most beneficial when used for its intended purpose, to secure the financial future of dependents upon your death. If it is instead used as a substitute for an investment portfolio it loses some of its benefits. So, you should be very careful about purchasing universal life when using it for any other purpose aside from as insurance.
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