How Does Universal Life Insurance Work?
Universal life insurance for government employees is a type of permanent life insurance. It can protect you for the duration of your life, as long as the premiums are paid. Some forms of universal life insurance also offer a cash value component.
The cash value can build up investment gains and sometimes get hit with losses, depending on the policy type.
You can take money out of cash value via a withdrawal or loan. The insurance company will reduce the payout to your beneficiaries by the amount of any withdrawals or outstanding loans if you pass away. But for some buyers, accessing cash value is more important than a full payout to beneficiaries later on.
Government Employee Pension Plans
As in all government expenditures, taxpayers ultimately foot the bill, but they are not the only ones with “skin in the game.” Retirement annuities aren’t just given to government employees when they stop showing up for work. A government employee will contribute a portion of each paycheck to their retirement systems, which much later down the road entitles them to annuity payments.
When individuals take public service jobs, part of the decision to accept a job offer is whether the person can live off the salary minus the retirement contribution. The tradeoff is the employee does not have to save as much for retirement from the remaining salary dollars. Also, the investment is entirely or partially handled by the retirement system.
Pension Protection With Universal Life Insurance
When teachers retire, they are faced with a decision on what pension option they should take. The ‘max pension option’ will provide you with the highest income for which you are eligible. All the other options – called “Survivorship options” – will provide an income less than the max option. The ‘max pension option’ will provide you with income until you pass away. Once you pass away, your pension income goes away – it will not be passed on to your spouse or children. Survivorship Options provide a safety net for your spouse – if you pass away and you have a survivorship option – your spouse will receive a pension income for as long as she lives. Having a universal life insurance policy will allow you to take the max pension option without sacrificing coverage for your loved ones in the worst-case scenario.
Universal Life vs Whole Life
The flexibility that a universal life policy provides is a key differentiator over whole life. As a result, universal life insurance premiums are typically lower during periods of high interest rates than whole life insurance premiums, often for the same amount of coverage.
Another key difference would be how the interest is paid. While the interest paid on universal life insurance is often adjusted monthly, interest on a whole life insurance policy is normally adjusted annually. This could mean that during periods of rising interest rates, universal life insurance policy holders may see their cash values increase at a rapid rate compared to those in whole life insurance policies.
Some people may prefer the set death benefit, level premiums, and the potential for growth of a whole life policy. However, for those who would prefer to have more flexibility and options when it comes to their permanent life insurance, then universal life might be the better choice.