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What Is Universal Life Insurance?

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Updated October 14, 2023

Like other forms of life insurance, universal life can help you create financial security for your family (or other beneficiaries) if you pass away. And as a type of cash value insurance, a universal life policy can be used as an investment tool that grows and gives you access to money while you live. 

A universal life insurance policy may be a good choice depending on your life insurance needs, investment needs, and risk tolerance. A financial advisor can help you understand this and other life insurance options.

How does universal life insurance work?

Universal life is a type of permanent insurance. This means a policy stays in force until your death, provided you make your premium payments on time. Universal life also has a cash value feature that earns interest over the policy's life. This is money you can access through a loan or withdrawal. A notable feature of universal life insurance is that you can adjust your death benefit and premium payment as your needs change. 

When you buy a universal life policy, you and your insurance company agree to an amount of death benefit. You also designate policy beneficiaries (typically your family, but you may also choose people to whom you are not related, such as business partners or friends, depending on your needs). If you die while the policy is in force, the insurance company will pay the death benefit to your beneficiaries. 

The policy premium is proportional to the death benefit you choose, so a policy with a $1 million death benefit will cost much more than a policy with a $500,000 one.  

The cash value feature of a universal life policy works like an investment account. You fund it every time you make a premium payment. Part of your payment goes toward the insurance portion of the policy, another portion pays administrative fees, and the final portion funds your cash value. The insurer then invests that money and pays you interest. Exactly how the money is invested and how much your cash value can grow depends on the type of universal life policy you have. More about that in a bit.

How to use your cash value

You have multiple ways to access your cash value as its balance grows.

Make a withdrawal

You can withdraw funds as you would from a savings account; the amount withdrawn is typically deducted from your death benefit amount (thus reducing the amount your beneficiaries receive upon your death). Be aware that if your withdrawal amount exceeds the amount of money you’ve invested in the cash value, the excess may be considered a capital gain. You should discuss this with a certified tax preparer. 

Take out a loan

You can also take out a loan that will accrue interest until it's paid back in full. If you pass away before paying back the loan, the balance will be deducted from the death benefit.  

Surrender the policy

You can cancel coverage and receive the accumulated cash value if you no longer need your universal life insurance policy. The insurer will subtract any outstanding loan balances and fees. As with a withdrawal, any money you receive in excess of what you put into the cash value may be considered taxable.

There are no restrictions on how you use your cash value. You can pay for an emergency, supplement your retirement income, take a vacation, or even use it to pay the policy's premium. You can also let the cash value continue growing as a supplement to your retirement savings.  

It’s also worth noting (and this is often a caveat of cash value policies) that if you die, your beneficiaries will not receive the cash value. Instead, the insurance company keeps that money. 

Types of universal life insurance

There are multiple types of universal life insurance. You should review them—it helps to discuss it with a financial advisor—and choose a policy that best suits your needs. Here’s an overview of three common types.

Guaranteed universal lifeIndexed universal lifeVariable universal life
Cash value grows at a fixed interest rate.
Cash value is tied to a market index, such as the S&P 500.
Cash value is tied to a broader portfolio of investments, including indexes, money market accounts, or stocks.
Adjust death benefit and premium as needs change.
Adjust death benefit and premium as needs change.
Adjust death benefit and premium as needs change.
Least risky option, but the policy can be canceled for missing a single premium payment.
Investment losses and gains may be capped to limit risk and reward.
Option with the highest degree of risk and reward.

Guaranteed universal life

A guaranteed universal life (GUL) insurance policy allows you to adjust your premium and death benefit as your needs change. These policies typically have a cash-value component but earn interest at a modest rate set by the insurance company. This is the least-risky universal life option and may be ideal for someone who needs a policy primarily for its insurance function.

Indexed universal life

An indexed universal life (IUL) insurance policy also allows adjustment of the premium and death benefit. The cash value is tied to the performance of a major stock index, such as the S&P 500. If the S&P grows at a certain percentage over a specific time period, so will the policy's cash value. IUL gains and losses are typically capped. While this means your losses are limited in poor years for the market, your gains are also limited in very good years. An IUL thus provides a bit more risk and reward than a GUL.

Variable universal life

As with the other policy types we’ve explored, a variable universal life (VUL) insurance policy allows adjustment of the premium and death benefit. A VUL has a higher degree of risk and reward than a GUL or an IUL. The cash value of a VUL may be invested in a broader portfolio of investments, including indexes, money market accounts, and individual stocks and bonds. This type of policy typically requires some degree of active management by the policyholder.  

Universal life vs. whole life insurance

If you’re in the market for life insurance, you’ll probably want to compare universal life and whole life. While both are types of permanent life insurance with many features in common (including cash value), they do have some key differences. 

Both policy types stay in effect until your death unless you surrender the policy or it’s canceled due to nonpayment of the premium. Both types allow you to choose a death benefit and beneficiaries. Both types also have a cash-value component, which—as it grows—can be accessed through a withdrawal or loan.

Depending on the type of universal life policy you buy, you may assume greater investment risk than with a whole life policy, which has a fixed interest rate. Also, a universal life policy allows you to alter your death benefit and premium if your needs change. A whole life policy features a fixed death benefit and premium.  

Universal life vs. term life

You may also want to compare universal life with term life. Both allow you to choose a death benefit and beneficiaries, making them good options for financial planning. 

However, whereas a universal life policy is intended to be in effect until your death, a term life policy is in effect only for a set term of 10, 20, or 30 years. Once the policy expires, no coverage is in place—and no death benefit is paid if you die. A term life policy also lacks a cash-value feature. It's life insurance, pure and simple. For these reasons term life typically costs far less than a universal life insurance policy.

How much does universal life insurance cost?

The cost of universal life insurance varies according to a range of factors. These include your age, gender, whether or not you use tobacco, and your overall health. The amount of your death benefit also affects what you pay, and costs typically vary by insurer. It may pay to shop around.

Here are average monthly premiums for $1 million of coverage for a 40-year-old nonsmoker, according to a recent review by U.S.News and World Report. You'll note that a universal life policy costs about half of a whole life policy but several times more than a term life policy.

TypeFemaleMale
Universal life
$579
$674
Whole life
$1,003
$1,225
30-year term life
$138
$176

Pros and cons of universal life insurance

ProsCons
Ability to modify premium and death benefit as your needs change.
Costs much more than term life (though typically less than whole life).
Cash value feature offers an additional option for your investment portfolio.
Generally riskier than whole life, depending on which type of policy you choose.
Varying levels of risk and reward, depending on which type of policy you choose.
IUL caps can limit your gains in exceptionally strong years for the market.
Policy designed to stay in effect until your death.
Cash value does not go to beneficiaries upon your death.
Cash value earnings tied to the stock market; may outperform interest rates for other types of policy.

Best universal life insurance companies

Universal life insurance is not as common as term life or whole life, but it is offered by some of the biggest and best-known American insurance companies. These include State Farm, Nationwide, Mass Mutual, and Northwestern Mutual. In fact, each of these companies made a recent list of the best universal life insurance companies published by U.S. News and World Report.

Should you choose universal life insurance?

As with any type of permanent life insurance, universal life is right only for a certain kind of person. You want the financial protection of life insurance but also to diversify your investment portfolio, or you want to use life insurance for estate-planning purposes. You may also be attracted to the ability to adjust your universal life insurance premium and death benefit as your needs change.

Universal life is considered a complex type of insurance, particularly compared with simpler, term life coverage. To be sure you’re getting a universal life insurance policy that’s right for you, discuss your needs with an independent insurance agent or investment advisor. 

TIME Stamp: Universal life offers a greater degree of risk and reward than other types of permanent insurance

If you're interested in permanent life insurance, you'll want to consider universal life. Besides offering financial security for your beneficiaries, universal life has a cash value feature. This is a type of investment account that, depending on the specific type of policy you buy, is tied to the performance of the stock market. Thus, universal life tends to offer more potential rewards and risks than other types of permanent insurance. 

Frequently asked questions (FAQs) 

Should I cash out my universal life insurance policy?

You can access your cash value through a withdrawal or loan, but there are some caveats to both approaches. If the amount of money you withdraw exceeds the amount you've put into the cash value, the excess may be taxable. Furthermore, any amount you withdraw will be deducted from your death benefit, decreasing the amount of money your beneficiaries receive. 

Loans tend not to have the tax implications of a withdrawal, but you should be aware that the insurer will charge interest on the balance. Any unpaid balance will be deducted from the policy's death benefit.

Which riders are offered with universal life insurance policies?

Riders are bits of contract language that can be added to your universal life insurance policy to change or enhance your coverage. Common riders include accelerated death benefit, accidental death and dismemberment, long-term-care coverage, and waiver of premium. 

What happens to cash value in a universal life policy at death?

The insurance company typically keeps the cash value of a universal life insurance policy upon the policyholder's death. This is one of the caveats of cash value life insurance. 

Is universal life insurance a good investment?

Universal life insurance may be a good investment if you’ve maxed out your 401(k) and other options and want to diversify your investment portfolio. An insurance agent or financial advisor can help you understand the pros and cons of a policy and choose what's best for you.

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