What is universal life insurance?

Last updated: December 2021

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 as long as they pay premiums and fulfill any other requirements of their policy to maintain coverage. Like many permanent life policies, universal life insurance combines a savings component (called "cash value") with lifelong protection. When you pass away, the policy's death benefit is paid out to your beneficiaries.

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What are the benefits of universal life insurance?

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.

Withdraw money or borrow against it

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)¹. 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.

Earn interest on your policy's cash value

The cash value of a universal life policy generally earns interest that's in line with current money market rates, says the Insurance Information Institute (III). Of course, it's important to note that the interest rate will fluctuate along with the market, which means the interest you receive may also go down. But, some companies offer protection against that with a minimum performance guarantee on the policy.

Flexibility with premiums

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, the III says.

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.

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.

Adjust the policy's death benefit

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, as long as you pass a medical exam, says the III² ³. 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.

What is the difference between universal life insurance and whole life insurance?

With a universal life insurance policy, you may be able to adjust your premiums and death benefit over time to suit your needs. With a whole life insurance policy, the premiums and death benefit are fixed for the duration of the policy.

Benefit
Whole life insurance
Universal life insurance

Lifelong protection, as long as premiums are paid

Yes

Yes

Cash value

Yes (increases at a predetermined schedule)

Yes

Interest on cash value

N/A

In line with current money market rates

Premiums

Fixed

Flexible

Who might choose universal life insurance?

The III offers some guidelines on how to decide whether permanent life insurance like universal life is right for you:

If you're looking for coverage that lasts your entire life.

If you maintain a positive cash value on your policy, universal life pays a death benefit to your beneficiaries no matter when you pass away.

You have long-term savings goals.

If you want to build tax-deferred savings and don't expect to tap into the funds for a long time, universal life may be a suitable option for you, the III says. The cash value option that's part of a universal life policy may be available for you to withdraw or borrow against in an emergency.

It's a good idea to talk with your insurance provider to better understand your life insurance options. They can help you review your personal situation and long-term goals to help you choose a policy that's a good choice for you and your family.