What is universal life insurance?

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)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.

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..

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.

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.

If you’re searching for a cheaper life insurance alternative, term life coverage could be a better option for your budget. In fact, it is often the cheapest type of life insurance. Term life policies don’t accumulate cash value, but they have a guaranteed benefit amount for a set period of time.

If you want predictability and consistency, whole life insurance coverage could be a better option for you. It often costs a little bit more than a universal life policy, but it has steady premium payments. Additionally, whole life insurance policies offer a cash value that increases according to preset values and the death benefit amount remains stable.

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.