Cash Value on Universal Life

Q: I did not see you mention anything in your part 1 or 2 (see Beware of Universal Life Insurance and Beware Universal Life Insurance II) about building up a cash value in your policy when you buy universal life. We know that you can not do that when you buy term and you should mention that there is a way to take advantage of your cash value and never be taxed on it. If you are going to tell them , tell everything.

A: Cash value may build up in a Universal Life policy. And the contract owner has the option... of taking money out of it without having to pay taxes. The reason for that, though, has nothing to do with it being a Universal Life policy. The reason there aren't any taxes is because it is a loan. There's never any tax on a loan regardless of the source.

Moreover, the owner then has to pay interest on the loan. If it was the owners money in the first place why should he/she have to pay interest on it? The reason that there is cash value in the first place is because the amount the owner was paying in premium was much higher than the underlying cost of insurance.

So let me illustrate it this way (making up the numbers). One can buy a 20-year term life insurance policy for $100 a month. That gives us an indication of the underlying cost of insurance. Or he/she can buy a universal life policy for $200 a month. Of course, the cash value in the universal increases---because so much more is being paid in.

Lastly, the money taken out of a universal policy is only tax-free if the policy stays in force until the person dies. It can be transferred to another life insurance policy, but it can't be moved out of life insurance without that loan either having to be repaid or it become taxable.

Doesn't make much sense to me.

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