What is universal life insurance?

Key points

• Universal life insurance is a permanent coverage that lasts a lifetime if policy requirements are met.
• It allows flexible premiums and death benefits, and policyholders can borrow or withdraw from the cash value, which may reduce benefits or risk policy lapse.
• The cash value earns interest tied to the insurers general account and may include a minimum guarantee, but returns can fluctuate.
• It offers more flexibility than whole life insurance, while term life may be a lower-cost alternative but often gives up some of the guarantees whole life provides.

Universal life insurance is a type of permanent life insurance. With a universal life policy, the insured person is covered for the duration of their life if they fulfill the requirements of their policy to maintain coverage, while having premium and death benefit flexibility.

One of the main factors distinguishing universal life insurance from other types of coverage is policy flexibility. For example, several types of universal life insurance allow you to adjust your premium payments and increase or decrease the death benefit amount to meet your needs. A universal life policy contains a cash value amount you can borrow against or withdraw from.

There are several kinds of universal life insurance to choose from and depending on the one you choose, policy fees could fluctuate, interest may be credited differently or you could be forced to take a more active role in managing the investments that make up your cash value amount.

Beyond lifelong protection, there are a few additional features of universal life insurance:

• You can withdraw money or borrow against the policy's cash value.
• Your cash value earns interest.
• You have flexibility with premiums.
• You can adjust the death benefit.

Can you withdraw money or borrow against a universal life policy?

When you pay your premium on a universal life insurance policy, a portion of each payment goes toward paying for the death benefit. Another portion also goes to building up the policy's cash value. Over time, after money has accumulated, you may be able to withdraw or borrow against the cash value of the policy (the available amount will vary by company). The rules on how and when you can do this vary by insurance company and policy. However, it's important to know that this may reduce your death benefit, create a tax implication or even cause your policy to lapse.

Does universal life insurance earn interest?

The cash value of a universal life policy generally earns interest that's in line with current declared rates. Of course, it's important to note that the interest rate will fluctuate, which means the interest you receive may also go down or up. But, some companies offer protection against that with a minimum performance guarantee on the policy.

Are premiums flexible with universal life insurance?

If the cash value of your account can cover the costs, you may have the ability to lower or stop paying your premiums on a universal life policy for a certain amount of time.

This can be helpful if money becomes tight and you're looking for ways to lower monthly bills. But there can be negative consequences, too, says the III. For instance, your coverage may end if you use up the account's cash value to pay for premiums. Some policies are designed to only pay premiums for a shorter time, like until retirement, and a universal life policy allows this design as well.

Keep in mind that even though your premiums are flexible, you must maintain a positive cash value, otherwise your policy will lapse (meaning you no longer have coverage). Your insurer may offer a grace period -- a specified amount of time in which you have to make a payment to restore your policy to a positive cash value status before coverage lapses. Read your policy or check with your insurance provider for more information.

Can you adjust the death benefit on a universal life policy?

The flexibility of a universal life policy also extends to the death benefit. At some point, you may want to increase the amount that's paid out upon your death. This is something some insurance companies allow, if you pass a medical exam. Likewise, you might choose to reduce the death benefit, to reduce the cost of the policy. Remember that if you increase the policy's death benefit, it may increase the premium you pay and most companies have a minimum death benefit you cannot go under.