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GUARDING AGAINST THE FINANCIAL PITFALLS OF DEATH

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tion. As long as there is enough money in the investment account to purchase death protection, the policy will remain in force. However, if this account should grow to an abnormally large amount, the amount of insurance protection will need to be increased. This is so the account can retain its tax-deferred growth status. The IRS requires that the death benefits in a universal life policy must always exceed the cash value by a specified amount.

This raises an important question. Because the premium is split, and the investment account is separate, is this actually whole life? Since the cost of insurance is subtracted from the cash value, the answer is yes. However, the cash value accumulates because of inter- est credited to the account. According to current tax laws, as long as the total value of the investment account is less than the total amount of premiums paid, the growth of the investment account will be tax- deferred. However, if a policy is canceled and the cash value is returned to the policyholder, and the cash value is greater than the amount of total premiums paid, the gain will be taxed. But, like other types of insurance policies, death benefits are received tax-free and the cash value grows on a tax-deferred basis.

Universal life policies have two types of death protection: Option A and Option B. First, Option A provides level death protection. When the cash value increases, the amount of pure insurance protec- tion decreases. The second choice provides a specified death protec- tion plus the appreciated cash value. With Option B, the death benefit varies with the rate of earnings in the investment account. It will also increase along with the growing cash value.

PROS AND CONS OF UNIVERSAL LIFE INSURANCE

Universal life policies are extremely flexible. Because the insurance protection comes from either the accumulated cash value or the annual premium paid, if you don’t want to pay the premium, you don’t have to. You just need to be sure that there is sufficient cash value within the policy to cover the cost of insurance. The cost of insurance will then be deducted from the cash value. Certainly, the older you are, the more it will cost to pay for the insurance, so it’s important that there is enough in the investment account to cover this.

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