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Universal Life Insurance

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Insurance can be a stressful and complicated subject, whether talking about the cost of auto insurance or the importance of life insurance. With life insurance, it’s centered around the idea of human mortality. None of us want to think about dying, but some responsibilities are hard to meet without proactive planning. 

It’s critical to make sure that debts don’t pass on to your loved ones, heirs, friends or business partners, and that your dependents are well cared for. When it comes to life insurance, there are many different kinds that can serve this purpose. 

One popular type of policy is universal life insurance. This article explores what universal life insurance is, how it works, when it makes sense or might be a good fit for your life and how this type of life insurance stacks up against others.

What is universal life insurance?

Universal life insurance is a type of permanent life insurance with a cash value component and relatively low premiums compared to other permanent life insurances. With this type of life insurance, customers are granted some control over the payment of premiums. Permanent life insurance means that once the policy is in force, it will remain with you for your whole life, so long as the premiums are paid. Within universal life insurance, there are three main subtypes: indexed, guaranteed and variable.

One of the critical characteristics of universal life insurance is its cash value feature. Depending on the type of universal life insurance, the policy may accrue cash value through investments. This cash value functions separately from the death benefit and does not pay out to beneficiaries, but has additional options for you to leverage.

How does universal life insurance work?

In many ways, universal life insurance functions like other life insurance policies. You fill out an application, take a medical exam (in most cases), wait on underwriting, and pay your premium to activate the policy. Those steps are reasonably consistent with most forms of life insurance. Where universal life insurance is unique is in its flexibility, permanency and cash value component.

Universal life can last for the insured individual’s entire life, which is why it’s classified as permanent insurance. When the policyholder dies, the death benefit is paid to that person’s listed beneficiaries. This payout is determined when the policy is made but allows the insured to adjust the death benefit and the premiums throughout the policy’s life. Changes in one category will generally be reflected in the other; paying a lower premium will lead to a smaller death benefit and vice versa. Not all forms of insurance allow for this flexibility.

Types of universal life insurance

Within universal life insurance, there are three main policy types. These three types are primarily differentiated based on how the cash value component accrues within them. Each is a fully functioning universal life policy, but each differs in how its investments function. 


Indexed universal life insurance policies are specialized by having its investment component rise and fall with a stock index. While these investments may have a minimum return rate, they also have maximum rates at which you can earn. Suppose the index is outperforming the maximum rate within your policy. In that case, your investment will gain at your maximum rate and not the current index rate. The investment potential for these policies is highly variable, and some experts consider them risky for consumers, so be sure to seek advice from a financial expert or discuss the policy in detail with a provider to ensure it’s a good fit for you.


Guaranteed universal life insurance is considered one of the most affordable forms of universal life but often represents the smallest cash value. These policies have fixed premiums and death benefits, making them atypical for universal life. While they offer little to no cash value, they benefit from being a “no-lapse guarantee universal life insurance.” These policies were designed to help prevent a type of life insurance lapse that can occur with other universal life insurance policy types.


Variable universal life insurance has the most flexibility of any universal life. With variable universal, you generally have a greater degree of control over the size of your death benefits and the cost of your premiums. Variable universal invests your cash value into a mutual fund, which allows your investment to be diversified between multiple industries and companies. With these policies, you may retain greater control over how your cash value is invested.

Universal life insurance and cash value

Universal life insurance includes a cash value feature that is supported by the policy premiums. A portion of these payments go into the investment portfolio of the account. These investments can generally be made in three different ways: through a stock index, by fixed interest or through a mutual fund. Any remaining cash value returns to the insurance company at the time of the policyholder’s death. Still, the policyholder has some options to use that cash value during their life.

Uses of the policy’s cash value are generally limited to paying the premiums, being withdrawn, being borrowed against or being surrendered. With some forms of universal life, you may use the cash value to pay off premiums on the policy once the investments have grown large enough. Some of the cash value may be directly withdrawn, but this typically results in an equivalent reduction in the policy’s death benefit. The cash value can often be borrowed against at relatively low interest rates. Finally, the plan may be surrendered for the policy’s cash value, minus any applicable fees.

Paying into an investment fund that you don’t fully retain is one of the disadvantages of universal life insurance.

Universal life vs whole life insurance

Both are types of permanent life insurance. The main difference between whole life insurance vs universal life comes down to their premium and investment rates. Universal life insurance has flexible premiums, while whole life has set premiums. Whole life insurance guarantees interest rates of cash value accumulation, and in contrast, universal life is often market-dependent.

Universal life insurance offers more overall flexibility than whole life does. Still, this same strength means that universal policies’ cash value component represents more financial risk than it does with whole life policies. Both policy types tend to be costlier, but universal is often cheaper than whole life, and offers more leeway to reduce your premiums.  

Universal life insurance vs term

Term life insurance and universal life have several significant differences. Universal life insurance is a form of permanent life insurance, while term life is not. Term life is only valid for a predetermined amount of time. Unlike universal life, term life does not have a cash value component. Because of these factors, term life can be significantly cheaper than universal life.

Beyond the duration and investment differences, term and universal also stand apart when determining premiums and death benefits. A term life insurance policy will have these variables determined when the plan is first created, whereas a universal life insurance policy allows for a degree of ongoing flexibility.

The takeaway

  • Universal life insurance is a type of permanent life insurance.
  • Universal life includes a cash value component.
  • These policies are sometimes called adjustable life insurance because the premiums and death benefit are flexible.
  • There are three subtypes of universal life insurance policy: indexed, guaranteed and variable.

Universal life insurance offers a form of investment opportunity as well as a death benefit. This cash value component is determined by the subtype of policy: indexed, guaranteed, and variable. Although the cash value can be drawn upon or surrendered during the policy’s life, any remaining cash value will go to the insurance company if the insured individual dies. In contrast, the death benefit goes to the insured individual’s beneficiaries.

While universal life insurance offers several incentives that term life does not, term life is often recommended because it tends to be simpler and has lower premiums. That said, universal life may be a better fit for someone who is seeking an alternative investment source along with a permanent life insurance policy. Whether shopping for car insurance or life insurance, it’s always recommended to shop around before settling on a policy.

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