Premium Payments
The premium payments are invested by the insurer and are used to create the policy's cash value. Part of the cash value is used to pay for policy expenses, such as the cost of insurance and other charges. After the first premium payment, premiums can be increased, decreased and even skipped, within certain limits. By overfunding the policy (or increasing each premium payment) the most can be made of the tax deferral, which translates in to the potential to access more money tax-free later on. Keep in mind, if the policy is funded in excess of certain IRS limits, the policy may lose many of its tax advantages. Also, it is possible that coverage may not continue to maturity date if policy costs reach maximum guaranteed levels, and premiums continue to be paid at the initial planned premium level.
The policy owner has the flexibility to not make premium payments provided the account value is sufficient to cover current monthly charges; however, not paying premiums can result in reduced account values and increases the risk that the policy could lapse.
Death Benefit
The death benefit replaces income that would be lost upon death and helps ensure that your client's family has the money they need to meet their immediate and future income needs. It readily provides funds to the family for personal or business needs, usually without the delays and expense of probate. As long as the policy is properly structured, the death benefit is usually paid income tax free to the beneficiary. However, the death benefit may be subject to estate taxes depending on the size of the estate, the beneficiary, and the ownership arrangement within the policy.
Access to Policy Values
While universal life insurance should be treated as a long-term financial tool, the policy's account value can be used to fund large purchases or unexpected expenses. Cash values can be withdrawn from the policy up to the total amount of premiums paid in without paying income taxes. These withdrawals are tax-free because they are considered a return of cost basis. Once the cost basis is withdrawn, additional policy values can be accessed by policy loans, which gives tax-free access to the remaining cash value in the policy. Both loans and withdrawals will reduce the policy's cash value and death benefit and excessive loans or withdrawals may cause policy to lapse. Remember, the full tax advantages of the policy remain intact only if the policy is kept in force for the insured's lifetime.
Ameritas No-Load Universal Life (Form 3157) is issued by Ameritas Life Insurance Corp.
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