What is universal life insurance?

This type of life insurance can offer more financial flexibility

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No one likes to think about the day when they or their loved ones will die, but it’s an important part of your finances. Life insurance can help to ease any concerns about what will happen financially to your loved ones after you’re gone.

Universal life insurance is a form of permanent life insurance, meaning it’s designed to last for the lifetime of the insured person. But unlike term or whole life insurance, universal life policies have adjustable premiums and the death benefit is not guaranteed.


Key insights

Universal life insurance is a form of permanent life insurance that earns cash value at a variable market rate in most cases.

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Variable universal life insurance policies allow you greater control over how the cash value is invested.

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Unlike whole life insurance, which has level premiums, you can adjust premium payments on a universal life policy.

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If you make minimal premium payments for too long, it may diminish the death benefit.

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What is universal life insurance?

Life insurance is a contract between an insurance company and an individual, known as the policyholder. The policyholder agrees to pay a specific sum, called the premium, to an insurer. In exchange, the insurance company agrees to pay a set amount of money, called the death benefit, to the designated beneficiary (or beneficiaries) if the insured person dies.

Universal life insurance is a form of permanent life insurance that is intended to last for the duration of the insured person’s lifetime — so long as premium payments are current.

Also, some forms of universal life allow you to invest your policy’s cash value in stock or bond funds, offering the potential for greater returns (but more risk) than whole life.

A typical universal life insurance policy pays a tax-free death benefit upon the insured person’s passing and contains a savings component that can be accessed by the policyholder. Death benefits can range from less than $25,000 to $500,000 or more, depending on the insurer and policy.

Universal life insurance vs. whole life insurance vs. term life insurance

Universal life differs from term or whole life insurance in the way premiums are paid. Unlike with these other forms of insurance, universal life premiums are adjustable, meaning the policyholder can increase or decrease payments over time.

In addition, the cash value of a universal life policy typically grows at a variable market rate rather than at a fixed rate.

Some insurers may offer universal life insurance with additional investment options, allowing you to invest the cash value in stock or bond funds, offering the potential for greater financial gain than with a fixed rate of return. Policyholders can access this cash value through withdrawals or loans, but doing so can diminish or deplete any potential death benefit.

The advantage to this kind of life insurance is financial flexibility — you can adjust your payments to fit your budget or use the policy’s cash value to fund your premium.

“Compared to whole life, universal life generally offers lower premiums while still building cash value,” said Randy VanderVaate, a licensed insurance agent in Dallas and CEO and founder of Funeral Funds of America. “This can be a good option for those who want some cash value growth but prioritize affordability over a guaranteed cash value amount.”

How whole life insurance compares

Whole life insurance is another form of permanent life and also has a savings component that builds cash value.

Unlike universal policies, whole life insurance typically invests the policy cash value at a low, fixed rate of return. Premiums are level in most cases, and the death benefit is guaranteed.

“People who want predictable premiums will benefit from whole life insurance because this policy comes with fixed premiums that remain constant throughout the policy,” VanderVaate said. “This provides stability and ease of budgeting compared to term life, which will significantly increase in price after the policy contractually terminates.”

How term life insurance compares

Term life insurance is temporary life insurance that lasts for a specific period of time, typically five to 30 years. Premiums are level, meaning they won’t increase, and the death benefit is guaranteed. Unlike permanent life insurance, term life policies contain no cash value to invest.

“People with temporary financial needs will also benefit from term life insurance because term insurance can cover specific needs during a certain period,” said VanderVaate. “If you have a young family or debt that needs covering for the next 20 years, term life is a good fit. As your needs change, you can re-evaluate your coverage.”

» MORE: Term vs. whole life insurance

How universal life insurance works

Before you buy a universal life insurance policy, think how much of a death benefit you want to leave your beneficiaries, whether there are any optional riders you require and what you can afford. You can find free online life insurance calculators on many insurer websites that can help you determine how much coverage is ideal.

Next, you’ll want to get a quote from at least three or four insurance companies to get an idea of what premiums are like. You will likely need to speak with a company representative or agent in order to get a quote, and you also may need to undergo a medical exam before you’re approved to purchase a policy.

In addition, you’ll need to designate a beneficiary (or beneficiaries), who will receive the death benefit upon the insured person’s death. Beneficiaries can be individuals such as friends or family, or be an institution such as a charity or college.

A typical universal life insurance policy includes the following:

  • A death benefit, which will be paid tax-free to the policy beneficiaries upon the death of the insured.
  • A savings component, which invests the cash value in a variety of market-rate options, such as mutual funds or stock or bond market indexes.
  • A variable rate of return, based on market performance, rather than a fixed rate of return.
  • Optional riders and add-ons, which can provide additional coverage for yourself, your spouse or your children.

Types of universal life insurance

A standard universal life insurance policy contains a savings component that accrues cash value based on market rates, which can vary over time.

Like other kinds of life insurance policies, a universal life policy also has a death benefit that will be paid to the beneficiaries once the insured person has died. Unlike other types of life insurance, however, the death benefit is not guaranteed.

Other types of universal life insurance include:

  • Indexed universal life insurance (IUL) policies invest the cash value in stock market index funds, such as the Nasdaq or S&P 500, rather than in a money market like a regular universal life policy. This offers potential for greater returns on your investments, but comes with greater risk for loss as well. To provide some security, IUL policies typically have a minimal rate of return guaranteed.
  • Variable indexed universal life insurance (VUL) is another form of permanent life insurance. It, too, comes with a savings component that builds cash value over time. But policyholders can invest that cash value in stocks, bonds and mutual funds, as well as more conservative options. VUL policies carry even greater financial risk and reward than traditional universal or IUL policies.

» MORE: Types of life insurance

Pros and cons of universal life insurance

As with whole life, universal life policies contain a savings component that can accumulate cash value over time and be accessed by the policyholder in the form of withdrawals or loans.

Unlike whole life, premiums and death benefits can be adjusted up or down, and policyholders have more options for how the cash value is invested.

Pros

  • Premiums are adjustable
  • Includes savings component linked to market performance
  • Can cash in policy if needed

Cons

  • Death benefit is not guaranteed
  • Cash value does not grow at a fixed rate
  • Substantial fees and taxes may apply
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FAQ

What is the death protection in universal life insurance?

“Death protection” is another phrase for a universal life insurance death benefit. This is the amount of money that is to be paid tax-free to your beneficiaries upon your death, provided premium payments have been kept up and there are no outstanding withdrawals or loans against the cash value.

Unlike whole life insurance, which has a guaranteed death benefit, universal life insurance does not. If you make irregular or minimal premium payments, you risk diminishing or depleting the death benefit.

What's the difference between universal and whole life insurance?

Both universal and whole life insurance are forms of permanent life insurance, designed to last for the length of the insured’s lifetime. With whole life insurance, premiums are fixed and regular. The death benefit is guaranteed, and the cash value grows at a fixed rate.

With universal life insurance, premiums can be adjusted up or down, which can increase, decrease or even deplete the policy’s death benefit. The cash value grows at a variable market rate, which can increase or decrease over time (a base rate typically is guaranteed).

Can you cash out universal life insurance?

Yes, in most cases you can cash out, or surrender, a universal life insurance policy as long as it has accumulated sufficient assets.

However, you’ll likely face steep fees or related penalties for surrendering your life insurance policy — as much as 40% of the cash value, depending on how long you have maintained your coverage to date. You may also owe income or other taxes on the money you receive.

Bottom line

With universal life insurance, you can increase or decrease your premium payments, make them on an irregular basis or even use the accumulated cash value to cover your premium. While this offers a greater degree of financial flexibility than whole or term life policies, you also run the risk of diminishing or depleting the policy death benefit if you don’t make regular premium payments.

Depending on the policy and the insurer, universal life can offer you a wider range of options for growing the cash value, including investing in stock or bond index funds. This offers the potential for greater return, but also increased risk for loss, which can negatively impact the death benefit.


Article sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
  1. Prudential Insurance, “What is life insurance and how does it work?” Accessed March 13, 2024.
  2. Insurance Information Institute, “Life Insurance Basics.” Accessed March 13, 2024.
  3. Guardian Life, “Universal life insurance.” Accessed March 13, 2024.
  4. Progressive, “Universal Life Insurance.” Accessed March 13, 2024.
  5. Progressive, “Types of life insurance explained.” Accessed March 13, 2024.
  6. Guardian Life, “What is the cash surrender value of life insurance?” Accessed March 13, 2024.
  7. Fidelity Life, “Can You Cash Out a Whole Life Insurance Policy?” Accessed March 13, 2024.
  8. Farmers Insurance, “Universal Life Insurance.” Accessed March 13, 2024.
  9. USAA, “Types of permanent life insurance: Which is best for you?” Accessed March 15, 2024.
  10.  Insurance Information Institute, “What are the different types of permanent life insurance policies?” Accessed March 15, 2024.
  11. Progressive, “What is a life insurance rider?” Accessed March 16, 2024.
  12. Bestow, “Universal Life Insurance vs Term: What's the Difference?” Accessed March 16, 2024.
  13. State Farm, “Universal Life Insurance.” Accessed March 16, 2024.
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