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How universal life insurance works

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  1. You decide (up to limits regulated by federal tax law) when and how much premium payment to "pour in." The minimum premium is based on insurance company expenses, premium taxes, and the cost of pure insurance for your policy.
  2. As you pay your premium, the insurance company deducts its sales expenses and premium taxes.
  3. The remainder of your premium is credited to your cash value account. Each month, the company charges this account for its other expenses and the cost of pure insurance (net amount of risk coverage), or mortality cost.
  4. Your cash value earns interest at a rate that fluctuates based on the rates earned by a segregated portfolio within the insurance company's general account. A minimum (guaranteed) interest rate will be stated in your policy.
  5. If the company's portfolio earns more than the guaranteed interest rate, the company credits the excess interest to your policy.
  6. If your remaining cash value is not sufficient to cover expenses and the cost of pure insurance, and you do not pour in more premium, the policy amount may then have to be reduced, or your policy will lapse. This would be similar to crushing the container at the top.
  7. You may take a policy loan in an amount not to exceed the policy's cash surrender value less the annual loan interest. Repayment replenishes your cash value; any loan balance outstanding (plus interest due) at your death is deducted from the policy amount paid to your beneficiary.