What to Know About Universal Life Insurance

This type of permanent life insurance offers a lot of flexibility, but it comes at a price.

Written by Devon Delfino / May 5, 2022

Quick Bites

  • Universal life insurance, like whole life, is a type of permanent coverage since it can last a lifetime.
  • With a universal policy, you can build up a cash value, which is money you can access while you have the policy; the ways the account accumulates cash value will depend on the policy type.
  • You’ll generally pay more for universal life than you would for term coverage, but it’s not as expensive as whole life insurance.
  • Universal life policies offer more flexibility than other options, but there can be downsides.

Buying life insurance is hard no matter what. After all, it involves contemplating your mortality. Then there are so many options out there, from term to whole life to universal life. How do you know what’s right for you?

To help you get a handle on your options, here’s what you should know about universal life insurance before you decide on the right type of policy for you.

Inside this article

  1. What's universal life insurance?
  2. How does it work?
  3. How much does it cost?
  4. Universal vs. whole and term
  5. Should you get it?

What is universal life insurance?

Universal life insurance is a type of permanent coverage. Provided you keep paying your premiums, the policy will remain in force until your death, at which point your beneficiaries will receive a death benefit.[1] That’s different from term life insurance, which is for just a set number of years.

How does universal life insurance work?

As with any kind of life insurance, with a universal life policy you pay a monthly premium in exchange for a predetermined death benefit. That said, universal policies, by letting you adjust both your premiums and your death benefit once you have the policy, stand out for their flexibility.

Be aware that you may have to undergo a medical exam to qualify for universal life insurance—and you’ll have to do it again if you want to increase your death benefit later.[1, 2]

Like whole life insurance, which is another type of permanent insurance, universal life policies also offer a savings component. A portion of your premium goes to building a cash value, which grows tax-deferred. You can take out a loan against the cash value (which accrues interest), and if you cancel your coverage the cash value can be returned to you.[3, 4]

Once your cash value builds up, you can tap it to pay all or a portion of your premiums for a certain amount of time.[1]

Depending on the type of universal life insurance you buy, your cash value can grow or decline in one of several ways:

Fixed:

The cash value accumulates based on a fixed interest rate.[5]

Variable:

The cash value is invested in “subaccounts,” which work like mutual funds; your returns, both positive and negative, are not capped.

Indexed:

The cash value’s return is based on a specific index like the S&P 500, and both gains and losses are limited as to how high and how low they can go.[6]

How much does universal life insurance cost?

In general, universal life insurance costs more than term life insurance, but less than whole life policies. To set your premium, insurers look at many factors, including:

  • Age

  • Gender

  • Tobacco use

  • Overall health

  • Size of death benefit[7]

The best way to understand how much a policy will cost is to get a quote. For reference, a healthy 40-year-old man might pay about $667 a month for a $1 million universal life policy.[4]

Universal vs. whole and term life insurance

These three major types of insurance differ in several ways. “Term insurance is like renting a home for a specified time,” says DeeDee Baze, a certified financial planner and owner of Alphemita Financial Services. While term insurance lasts for a certain number of years, whole and universal life can stay in force indefinitely.

“With whole life policies, your premiums are designed to stay the same for the rest of your life. Universal life policies are designed to have flexible premiums,” adds Baze. “Both permanent policies also allow you to take out some of the cash as a loan.” The flexibility of universal life policies can require more vigilance on your part to make sure the policy is in good standing, though (more on this later).

Here’s how the policies compare:

UniversalWhole Term
Coverage period [4]Permanent Permanent Temporary (often 10 to 30 years)
Premiums [4] Flexible Fixed Fixed
Cash value [4] Yes, but may not be guaranteed Yes; increases on a predictable scheduleNo
Adjustable death benefit? [8, 9] Yes, if you pass a medical exam No No
Death benefit amounts [10] $50,000 and up $50,000 and up $100,000 and up

Should you get universal life insurance?

Universal life insurance offers more flexibility than other types of coverage, allowing policyholders to adjust as their needs change over time. “In theory, they can start with lower premiums yet secure a policy that could last the rest of their lives with the intention of increasing the premiums later on in life when they are making more money,” says Baze.

Tip: When you’re shopping for an insurance policy, you can use the National Association of Insurance Commissioners’ state database to check out insurance agents in your area.

However, that flexibility comes at a cost: Your cash value can go up and down with the markets, whereas with whole life, it increases in a predictable way. The costs of a universal policy can also increase over time, eating into the cash value.[3]

“The problem I see most often is people get [universal policies] thinking they are a great financial investment along with a death benefit,” says Baze. “They get used to paying the lower premium, and life happens.”

But if you neglect to make sure you are paying enough every month to maintain the policy, especially when the stock market isn’t doing so well, your coverage can lapse. “The policy never gets funded the way it needs to be funded in order for it to last the rest of their lives,” says Baze. “When they contact an agent to get more information, they are told they have to increase their premiums tremendously to keep the policy going.”

What’s more, if your priority is to lock in an affordable premium (and invest your savings elsewhere), you may be better off with term life insurance rather than more expensive permanent insurance.

Ultimately, you’ll have to weigh your options carefully to settle on the right life insurance option. “There is no one size fits all when it comes to life insurance,” says Baze. “Just don’t be sold the newest, shiniest, idea that comes along. It needs to fit your situation,”

Article Sources
  1. Allstate. “What Is Universal Life Insurance?” https://www.allstate.com/tr/life-insurance/universal-life-insurance.aspx.
  2. Fidelity Life. “About Life Insurance Medical Exams.” https://fidelitylife.com/learn-and-plan/learning-center/why-do-i-need-a-medical-exam/about-life-insurance-medical-exams/.
  3. New York State Department of Financial Services. “Universal Life Insurance.” https://www.dfs.ny.gov/consumers/alerts/universal_life_insurance.
  4. Guardian. “Universal Life Insurance.” https://www.guardianlife.com/life-insurance/universal-life.
  5. Securian. “Fixed Universal Life.” https://www.securian.com/products-services/life-insurance/universal-life-insurance/fixed-universal-life-insurance.html.
  6. Guardian. “Variable universal life insurance explained.” https://www.guardianlife.com/life-insurance/variable-universal-life-insurance.
  7. Mutual of Omaha. “Universal Life Insurance.” https://www.mutualofomaha.com/life-insurance/universal-life-insurance.
  8. Insurance Information Institute. “What are the different types of permanent life insurance policies?” https://www.iii.org/article/what-are-different-types-permanent-life-insurance-policies.
  9. Insurance Information Institute. “What are the different types of term life insurance policies?” ​​https://www.iii.org/article/what-are-different-types-term-life-insurance-policies.
  10. Progressive. “Types of life insurance explained.” https://www.progressive.com/answers/life-insurance-types/#universal-life.

About the Author

Devon Delfino

Devon Delfino

Devon Delfino is a writer who’s covered personal finance—including everything from student loans to budgeting to saving for retirement and beyond—for the past six years. Her financial reporting has appeared in publications like the L.A. Times, U.S. News and World Report, Teen Vogue, Masha

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