What Is Universal Life Insurance?

A universal life plan is a blend of life insurance protection and investment accounts.

Part of the premiums you pay goes towards insurance; the rest goes into the investment component -also known as the cash or fund value.

The growth within the investment component is tax-deferred, subject to certain limits. At death, all funds may be paid to the beneficiary on a tax-free basis.

You decide how the savings component is invested, choosing one or more of the options provided by your insurance company.

A wide range of investments is available, including those whose returns are linked to equity or bond market indexes, money market accounts and guaranteed interest accounts.

At Death

The payout Upon your death, your beneficiaries will receive not only the face value of the policy's life insurance, but also the accumulated value of the investments if this death benefit option is selected. Both are usually passed along tax-free.

You can also tap into the cash value of the policy during your lifetime, although doing so has potentially negative side effects.

Not only do you slow the growth of the investment portion, withdrawing cash can trigger taxes and possibly early withdrawal penalties. Withdrawing any portion of the savings will reduce the amount available to your beneficiaries at the time of your death.

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