Ask questions, find answers
We get it, life insurance can feel complicated. We put our pencils, graphing calculators, and keyboards to work on our most frequently-asked questions. (And maybe a few surprises too...)
Before I Buy
Other than the life insurance benefit, one of the biggest benefits a Universal Life policy can feature is its tax advantages.
Generally speaking, the Account Value in a Universal Life policy earns tax-advantaged interest. And, even better, you can generally use your Account Value to receive cash tax-free, assuming your policy is not considered a MEC – all while having the life insurance to protect your loved ones.
The three tax advantages a Universal Life policy may offer:
Tax-Advantaged Interest
One of the tax advantages of universal life insurance is that you do not pay tax at the time interest is credited. Thus, you can earn interest on all the interest credited, called compounding. For other non-tax advantaged accounts, interest or realized gains may be taxed in the year earned annually. This is beneficial when you're subject to a higher state and federal tax rate.
Tax-Free Cash
Generally, using your Account Value to receive cash will not be subject to taxes.1 You may be able to use your Account Value by taking cash out up to your total payments tax-free at any time, assuming your policy is not considered a MEC. Plus, you have the option to take a loan from your Account Value for additional cash needs. An important option to you - your loan does not need to be paid back! However, using part of your Account Value to receive cash will generally impact the amount of your life insurance protection and may impact how long your policy remains active.2
Tax-Free Death Benefits
The Death Benefits payable are not taxable.3 And, as long as the Death Benefits are paid to individuals you named as beneficiaries, a Universal Life policy is not considered part of your estate. That said, you should consult with a Tax Advisor.
For more details
1Generally, you can access the Account Value in a Universal Life Insurance policy through withdrawals and loans. Withdrawals are tax-free to the extent of your total payments and assuming the policy is not considered a MEC. Total payments do not include interest or the match. If you take a partial withdrawal from the policy before the match vests, the match value will be reduced pro-rata. Accessing your Account Value through loans is tax-free, assuming your policy is not considered a MEC. However, if your policy terminates while there are any loans outstanding, you may be subject to tax. Tax laws are subject to change. You should consult a tax professional.
2In most cases, withdrawals reduce your coverage amount and loans reduce the amount of Death Benefit proceeds for your beneficiaries.
3Section 101(a)(1) of the Internal Revenue Code provides that life insurance Death Benefits are generally not subject to federal income taxation. Tax laws are subject to change. You should consult a tax professional.
A universal life policy has more features than term insurance. It provides life insurance protection like term insurance, but it can last for much longer – up to age 121.1 Many people choose universal life insurance for the Account Value component that earns interest. In addition to the life insurance protection, your Account Value grows when interest is credited.2 You do not pay taxes when the interest is credited on the Account Value. When you need extra cash, you can generally access your Account Value to take cash that is tax-free.3 You may also be able to change your payment patterns and insurance coverage.
For more details
1As long as the Account Surrender Value is sufficient to pay the monthly deductions for the insurance charges and a nominal administrative fee.
2Each month, the Account Value is reduced by the monthly deductions for the insurance charges and a nominal administrative fee. The monthly deductions may exceed the interest credited.
3Generally, Universal Life Insurance policies allow you can access your Account Value through withdrawals and loans. Withdrawals are tax-free to the extent of your total payments and assuming the policy is not considered a MEC. Total payments do not include interest or the match. If you take a partial withdrawal from the policy before the match vests, the Match Value will be reduced pro-rata. Accessing your Account Value through loans is tax-free, assuming your policy is not considered a MEC. However, if your policy terminates while there are any loans outstanding, you may be subject to tax. Tax laws are subject to change. You should consult a tax professional.
A buyer's guide can help you review and evaluate your options, including: types of insurance products, coverage needs, application processes, beneficiary designation, pricing and policy management.
State specific buyer's guides can be accessed here.
Universal life insurance provides life insurance protection, and it has a tax-advantaged Account Value component.
- Life insurance protection: You select the amount of insurance protection you want on your life. You may be able to change the amount of insurance protection to adjust with changes in your life.
- Account Value component: All or part of your payments are applied to the policy’s value, sometimes called the “Account Value,” which is used to pay for the insurance charges and other fees of the Universal Life policy. The remainder is credited with interest. You do not pay taxes when the interest is credited on the Account Value. The Account Value increases with your payments and with interest on the Account Value.
- Payment: After the first payment, you can choose how often to make payments (monthly, quarterly, annually) and how much to pay. The minimum amount you must pay to keep the policy in force is based upon the insurance charges and other fees of the Universal Life policy. The maximum amount is set by the IRS.
- Interest: The insurance company that issues the Universal Life policy sets the interest that is credited to the Account Value or Policy Value.
As a type of permanent insurance, Universal Life insurance is designed to provide insurance protection for up to age 95, 101, or 121 so long as there is sufficient policy value to pay the policy charges and fees. This means the Death Benefit may last longer than typical 10, 20 and 30-year term life contracts.
Other than the life insurance benefit, one of the biggest benefits of Universal Life insurance is that you can earn tax-advantaged interest on money you put into your Account Value. Plus, you can access that money (your Account Value) through withdrawals and loans – generally, penalty and income tax-free.
- You can generally take cash from your Account Value tax-free, either as withdrawals of the total payments paid-to-date or as loans as long as the policy is not a MEC. You are not required to pay the loans back. Taking withdrawals, and taking loans and not repaying them, will reduce the amount of Death Benefits for those you name as beneficiaries. Also, the lapse of the policy while any loans are outstanding will result in taxes based on the loans taken and the interest on the loans.
Universal Life and Whole Life are types of permanent insurance that can provide insurance protection for your entire lifetime up to age 95, 100 or 120, if the required payments are met. Universal Life gives you more flexibility than Whole Life.
- For Whole Life, you select at the time of purchase the life insurance protection you want. The payment is set based on the insurance protection you want and is generally not flexible. The payment amount must be paid when it is due for the entire term of the whole life policy. If the payment is not made, the policy may lapse. Also, the Whole Life insurance protection may not be changed.
- Like Whole Life, at the time you purchase Universal Life, you select the life insurance protection you want. You also select the payment amount and the frequency. If your situation changes, you can make certain changes to the life insurance protection, payment amount, and frequency. You can even stop making payments. But, if you do so, it is likely to impact how long the life insurance protection lasts.
Employer-provided policies often offer, at no cost to you, one to two (or sometimes even three) times your annual salary—and that’s a great start. The problem is this coverage is only lasts while you’re employed with the company, which puts you at risk if you change or lose your job. An individual Universal Life insurance policy is yours to keep no matter what your circumstances. Also, a Universal Life insurance policy couples the protection you need with the Account Value which earns interest and is another source for your cash needs.
It’s a good idea to take advantage of employer-provided life insurance. Many employers offer an amount equal to 1-2 times your annual salary at no cost.
If you have a family, would that amount provide enough money to help them maintain their lifestyle, meet their expenses, and achieve all of the dreams you have for them? Probably not. Additionally, employer-provided insurance is not portable, which means you can’t take the policy with you if you decide to leave that job or are terminated.
Universal Life insurance provides life insurance protection and it has a tax-advantaged Account Value component. Universal life insurance is often referred to as a type of “permanent” life insurance because it may last the insured’s entire life. Under a Universal Life policy, after the first payment, you can choose how often to make payments and how much to pay—it allows for flexible payments. A Universal Life policy also allows you to adjust the life insurance protection. Thus, it can adjust with the changes in your life.
Building Account Value
Yes, tax laws set a maximum payment to qualify for tax benefits of life insurance. If this maximum is exceeded, the Death Benefits will be taxable. Tax laws also set another limit on how much can be paid in before a policy becomes a “Modified Endowment Contract” (MEC). If this maximum is exceeded, withdrawals and loans will be treated as taking the interest credited to the policy first, and these withdrawals will be taxable. In addition, in general, if the Policy is a MEC and you take money out before age 59 ½, you will be subject to a 10% tax penalty.
If you make a payment that will cause your policy to become a MEC, you will be notified and asked whether you want your policy to become a MEC.
In addition to the life insurance protection, an important benefit of a Universal Life Insurance policy its savings feature through the Account Value. When you need extra cash, you can generally use your Account Value to take income that is tax-free.1
Your Account Value increases from two sources:
- Your payments to your policy
- The credited interest on your Account Value
Friendly reminder: Your Insurance charges and a nominal administrative charge are taken from your Account Value monthly.
For more details
1Generally, you can access your Account Value through withdrawals and loans. Withdrawals are tax-free to the extent of your total payments and assuming the policy is not considered a MEC. Total payments do not include interest. Accessing your Account Value through loans is tax-free, assuming your policy is not considered a MEC. However, if your policy terminates while there are any loans outstanding, you may be subject to tax. Tax laws are subject to change. You should consult a tax professional.
The IRS has a Life Insurance tax qualification called a Modified Endowment Contract, also referred to as a MEC. It occurs when cumulative payments exceed federal tax law limits in order to maintain the tax advantages. If your policy becomes a MEC, you lose the full tax treatment of your account value in your life insurance policy.
Accessing Money
Generally, you can choose to use the Account Value in a Universal Life Insurance policy the way you want. Many people choose to use their Account Value to supplement retirement or even take early retirement. Others use it to help pay for their children’s education. Whatever your choice, it is important to remember that using part of your Account Value to receive cash will generally impact the amount of your life insurance protection and may impact how long your policy remains active. Also, you will need to structure the payouts in a way that best suits your tax situation. Please consult your tax advisor when the time is right.
Generally, there are two ways to use the Account Value to get cash from a Universal Life policy free of income tax or early withdrawal penalties – withdrawals and loans. Monies are available in one large amount or as an income stream, depending on your needs. Withdrawals are tax-free to the extent of your total payments and assuming the policy is not considered a MEC. Keep in mind, total payments are all the amounts you paid into the policy and do not include interest. You can also take a loan from your Account Value tax-free, assuming your policy is not considered a MEC.
A few things to keep in mind - using part of your Account Value to receive cash will generally impact the coverage amount and may impact how long your policy remains in force. Also, if your policy terminates while there is a loan outstanding, you may be subject to tax. You should consult with your tax advisor to determine the tax treatment of any withdrawals or loans from your policy.
If your total Account Value is greater than the total payments, taxes may apply on any amount of growth that was due to interest accumulation. Due to state-specific tax laws that may apply, we suggest you talk to your tax advisor.
In Case of an Emergency
UnitedHealthcare creates and publishes the Machine-Readable Files on behalf of Security Benefit Corporation. To link to the Machine-Readable Files, please click on the URL provided: transparency-in-coverage.uhc.com
To locate and view Machine-Readable File information:
- Hit Ctrl-F on your keyboard to bring up a search bar.
- Type in Security Benefit Corporation and the associated MRFs will appear.
- Example: 2022-07-01_customer name_Choice-Plus_in-network-rates.json.
For more information, refer to the Transparency in Coverage external page on uhc.com.
Leaving a Legacy
Generally, you can choose to use the Account Value in a Universal Life Insurance policy the way you want. Many people choose to use their Account Value to supplement retirement or even take early retirement. Others use it to help pay for their children’s education. Whatever your choice, it is important to remember that using part of your Account Value to receive cash will generally impact the amount of your life insurance protection and may impact how long your policy remains active. Also, you will need to structure the payouts in a way that best suits your tax situation. Please consult your tax advisor when the time is right.
Generally, there are two ways to use the Account Value to get cash from a Universal Life policy free of income tax or early withdrawal penalties – withdrawals and loans. Monies are available in one large amount or as an income stream, depending on your needs. Withdrawals are tax-free to the extent of your total payments and assuming the policy is not considered a MEC. Keep in mind, total payments are all the amounts you paid into the policy and do not include interest. You can also take a loan from your Account Value tax-free, assuming your policy is not considered a MEC.
A few things to keep in mind - using part of your Account Value to receive cash will generally impact the coverage amount and may impact how long your policy remains in force. Also, if your policy terminates while there is a loan outstanding, you may be subject to tax. You should consult with your tax advisor to determine the tax treatment of any withdrawals or loans from your policy.
If your total Account Value is greater than the total payments, taxes may apply on any amount of growth that was due to interest accumulation. Due to state-specific tax laws that may apply, we suggest you talk to your tax advisor.