What is Universal Life Insurance?

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Updated: July 11, 2025

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Key Takeaways

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Universal life insurance allows you to adjust premiums and coverage amounts over time, making it more flexible than whole life.

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The policy's cash value can grow based on market performance, but poor returns may require higher out-of-pocket payments later.

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Unlike term life, universal life offers permanent coverage. But this only works if you actively manage cash value to cover rising insurance costs. It works best for people who want long-term protection and are comfortable tracking performance and making adjustments.

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What is Universal Life Insurance?

Universal life insurance is a type of permanent life insurance that combines lifelong coverage with flexible premiums and a tax-deferred savings component. It's designed for people who want more control over how their policy works, such as how much they pay and how their cash value grows.

Unlike term life insurance, which provides temporary coverage, a universal life insurance policy offers permanent protection as long as you maintain adequate premium payments.

What sets universal life insurance apart is its flexibility. You can adjust your premium payments and death benefit amounts within certain limits, making it adaptable to your changing financial situation.

How Does Universal Life Insurance Work?

Universal life insurance works by splitting your premium payments into two parts. When you pay premiums, a portion covers the cost of insurance (COI), while the remainder goes into a cash value account that earns interest.

  • Cost of Insurance (COI): This covers the actual life insurance costs, including mortality charges, administrative fees and other expenses for your death benefit.
  • Cash Value Component: The remaining amount goes into a cash value account, which earns interest based on the insurer's investment strategy, typically using stable vehicles like bonds. Over time, this account can grow, and you may be able to borrow against it or make withdrawals, depending on your policy's terms.

Universal Life Insurance Policy: Key Characteristics

Universal life insurance stands out from other forms of permanent life insurance due to its flexibility and investment potential. Here are the core features that set it apart:

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    Flexible Premiums

    You can adjust how much you pay. Increase premiums to grow cash value or reduce payments when money's tight.

    For example, if you're paying $300 monthly and receive a bonus, you might increase payments to $500 for several months to boost cash value. Conversely, during financial hardship, you could reduce payments to $150 monthly as long as your cash value covers the shortfall.

    This flexibility isn't available in traditional whole life policies.

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    Adjustable Death Benefit

    Coverage amounts can be increased or decreased (with insurer approval), allowing you to update your policy as your needs change.

    You might start with $250,000 coverage in your 30s, increase it to $500,000 when you have children, then reduce it to $100,000 in retirement when your mortgage is paid off and children are independent.

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    Investment Component

    Part of your premium goes into a cash value account that may grow based on market performance. This means you could see gains or losses depending on how your funds are managed.

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    Transparency

    Costs, fees and performance metrics are broken out in detail, so you can see exactly how your policy is performing and what you’re being charged.

Universal life insurance offers a mix of coverage and investment flexibility. Its adjustable structure makes it appealing for people who want more control over their life insurance as their financial situation evolves.

Universal Life Insurance Benefits and Drawbacks

Universal life insurance gives you more flexibility than whole life, with the potential for higher returns. But that flexibility comes with trade-offs you should understand.

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Benefits of Universal Life Insurance
  • Flexible Premiums: You can adjust how much and when you pay after the first premium. This allows you to tailor payments to your financial situation, unlike fixed-payment whole life policies.
  • Cash Value Can Help Cover Future Premiums: Paying more in the early years can build cash value that may help cover rising insurance costs later. This front-loading strategy can help keep the policy affordable as you age.
  • Investment Control Options: Some policies let you choose where to allocate your cash value, such as fixed interest accounts or equity-indexed strategies, giving you a say in how your money grows.
  • No Cap on Returns: Unlike whole life, universal life policies often don't cap returns. In a strong market, your cash value could grow faster, though returns aren't guaranteed.
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Drawbacks of Universal Life Insurance
  • Higher Risk of Lapse Without Monitoring: Premium flexibility comes with responsibility. If you underpay or stop tracking cash value, the policy can lapse, especially without a no-lapse guarantee.
  • Market Risk and Conservative Growth: Returns depend on market performance or interest rates, which may be low or unstable. You could lose value or see slow growth despite paying regularly.
  • Uncertain Long-Term Costs: As you age, the cost of insurance rises. If you haven't built enough cash value early on, maintaining the policy could become unaffordable later.
  • Strict No-Lapse Conditions: Policies with a no-lapse guarantee may cancel if you miss a payment by even one day, making them less forgiving than they appear.

Universal Life Policy: Who Should Buy It?

Universal life insurance can be a smart option for those who want lifelong coverage with flexibility in premiums and potential investment growth. But it requires regular monitoring to avoid policy lapse, unless it includes a no-lapse guarantee. Here are the types of buyers who may benefit most from this kind of policy:

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    Young, Newlywed Couples

    Young couples often qualify for low rates and have time to build cash value. With a life insurance for couples policy, they can make larger payments early, then reduce premiums or increase the death benefit as their family grows. Cash value can also help cover child care or other family expenses.

    Decision Framework: Choose universal life if you can afford higher premiums early and want investment growth potential beyond basic coverage needs.

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    Business Owners

    Business owners can choose the universal life policy that best suits their goals. The savvy investor could pick an indexed universal policy or variable universal life policy to get fast cash value growth and use the value to pay premiums down the line. They could also use the cash value to finance business expenses or pay for more life insurance.

    Decision Framework: Choose universal life if you can afford higher premiums early and want investment growth potential beyond basic coverage needs.

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    Sole Financial Providers

    Sole providers keep their families financially afloat. A universal life policy's flexibility can allow premium adjustments that help families weather financial hardships while the sole financial provider is still alive.

    Decision Framework: Essential if family depends entirely on your income and you need coverage flexibility during financial stress periods.

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    Individuals With Significant Debts

    The more debt someone has, the greater their need for life insurance. The flexibility in universal life policies means that as debts get paid down, policyholders can decrease their death benefits and save on premiums. With an index universal or variable universal policy, you can use the cash value growth to pay off debt faster.

    Decision Framework: Choose universal life if you have substantial debt but expect to pay it down over time, allowing you to reduce coverage and premiums as your financial obligations decrease.

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    Stay-at-Home Parents

    Stay-at-home parents may benefit from life insurance as their role in the home would be costly to replace. As needs change and the family expands, a universal life policy’s flexibility can match those needs. If the stay-at-home parent passes away, the death benefit from this policy can allow the working parent to choose to stay home or return to work. You can also use the policy's cash value for debts or expenses, or to pay premiums.
     

    Decision Framework: Essential if your household services would be expensive to replace and you need coverage that adapts as children grow and become self-sufficient.

Universal Life Insurance vs. Term

When comparing universal life insurance vs. term life, the main difference is flexibility and duration. Term life provides affordable, time-limited coverage, while universal life offers lifetime protection with investment potential.

Feature
Term Life Insurance
Universal Life Insurance

Coverage Length

Fixed term (e.g. 10, 20, or 30 years)

Lifetime coverage as long as premiums are paid

Premiums

Low and fixed for the term

Higher, but flexible — can adjust over time

Cash Value

None

Builds cash value over time; can be used or borrowed against

Complexity

Simple and straightforward

More complex — requires active management

Best For

Temporary needs like income replacement or mortgage protection

Long-term planning, wealth building, or estate strategies

Term life insurance works well for people who need coverage for a set period and want to keep costs low. Universal life may be better suited for those looking for permanent protection, flexible premiums, and the potential to build cash value over time, as long as they're comfortable managing a more complex policy.

Universal Life vs. Whole Life

Whole life and universal life are both types of permanent life insurance, meaning they offer lifelong coverage and a cash value component. But they differ significantly in flexibility, investment options and cost structure.

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Universal Life Insurance
  • Flexible Premiums: You can adjust how much and when you pay, within policy limits.
  • Adjustable Death Benefit: You may increase or decrease coverage as your needs change (with approval).
  • Cash Value Linked to Market Rates: Growth depends on interest rates or market performance; returns are not guaranteed.
  • Requires Ongoing Monitoring: You’ll need to track performance to avoid lapses and manage rising costs over time.
  • Best For: People who want long-term protection with control over payments and investments, and are comfortable with added complexity.
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Whole Life Insurance
  • Fixed Premiums: You pay the same amount for life, which helps with long-term budgeting.
  • Guaranteed Cash Value Growth: Cash value grows at a steady, insurer-set rate, with minimal risk.
  • Simple Structure: Easy to understand with no ongoing management required.
  • Dividends (if participating): Some whole life policies from mutual insurers may pay annual dividends.
  • Best For: People who want predictable costs, guaranteed growth and a hands-off policy.

Universal life works well for people who want long-term coverage with flexibility, especially those comfortable managing investment risk and using life insurance as part of a broader financial strategy. Whole life may be better for those who value predictability, want guaranteed growth, and prefer a policy they don’t have to actively manage.

Types of Universal Life Insurance

Universal life insurance comes in several variations, each offering different levels of flexibility, risk and guarantees. The right choice depends on your financial goals, investment knowledge and how much oversight you're willing to maintain.

Policy Type
Description

Traditional (Non-Guaranteed) Universal Life

This is the most basic and affordable form of universal life insurance. It offers flexible premiums, adjustable death benefits and a modest cash value component. However, it does not include any guarantees, meaning the policy can lapse if cash value drops too low or premiums are underfunded. This option may work well if you're looking to save on premiums and are prepared to monitor the policy to ensure it stays active.

No-Lapse Guaranteed Universal Life (GUL)

Guaranteed universal life provides long-term coverage with the added security of a no-lapse guarantee, as long as you pay the required minimum premiums on time. Cash value growth is minimal, but the trade-off is a policy that stays in force without needing frequent monitoring. This type is best for those who want the flexibility of UL but prefer a set-it-and-forget-it structure.

Indexed Universal Life (IUL)

IUL policies link your cash value growth to the performance of a market index (like the S&P 500). While your money isn’t directly invested in the market, returns are based on index movement, with a guaranteed minimum (often 0%–1%) and a cap on gains. This option may offer faster cash value growth than traditional UL, but also comes with risk. If the policy underperforms or is underfunded, it could lapse. IUL is better suited for people comfortable with market trends or working with a financial advisor.

Variable Universal Life (VUL)

VUL policies allow you to invest your cash value directly in a range of sub-accounts, including stocks, bonds and money markets. This gives you the most growth potential, but also the highest risk. Poor investment performance can cause the policy to lapse or require large additional payments to keep it active. VUL may appeal to experienced investors seeking long-term tax-deferred growth, but it demands active management and tolerance for volatility.

Universal Life Insurance Policies: Common Riders

Enhancing a universal life insurance policy with riders can provide additional security and flexibility to meet changing life circumstances. Riders allow you to customize your policy, offering benefits that can be pivotal during unforeseen events. Here are some common riders available for universal life insurance:

  • Accelerated Death Benefit Rider: This rider allows early access to part of the universal life insurance death benefit if the policyholder is diagnosed with a terminal illness, providing financial relief when needed.
  • Waiver of Premium Rider: Should you become disabled and unable to work, this rider waives the universal life insurance premiums, ensuring your coverage continues without financial strain.
  • Guaranteed Insurability Rider: This rider offers the option to purchase additional insurance at certain intervals without further medical examination, securing your ability to increase coverage as life changes.
  • Child Term Rider: This coverage adds temporary life insurance for your children on your policy. This can be converted into a permanent policy for them in the future without the need for a medical exam.
  • Long-Term Care Rider: If the policyholder requires long-term care, this rider allows access to the death benefit to cover these costs, which can help effectively manage the universal life insurance cost during difficult times.

Each rider adds a layer of protection and flexibility, making universal life insurance policies a comprehensive tool for long-term financial planning.

Universal Life Insurance Cost: Relevant Factors

Universal life insurance typically costs more than term life (and often more than whole life) because it combines lifelong coverage with an investment component. But unlike whole life, your premiums are flexible and can change over time based on how your policy performs. The cost of a universal life policy is influenced by several personal and policy-level factors:

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    Age

    The younger you are when you buy, the lower your premiums. Age directly impacts the insurer’s risk and your policy’s long-term cost.

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    Health

    Chronic conditions, family medical history and lifestyle habits affect your policy’s internal mortality charges and how much you'll pay over time.

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    Death Benefit Amount

    Higher death benefits mean higher premiums. You can adjust your benefit later, but increasing it often requires underwriting approval.

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    Investment Performance

    Poor investment returns can reduce your cash value, forcing you to pay more out of pocket to keep the policy in force. Strong returns may help cover future premiums.

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    Policy Features

    Add-ons like no-lapse guarantees, long-term care riders, or choosing indexed or variable cash value strategies can raise your premiums greatly.

Universal life lets you invest your policy’s cash value and potentially use it to pay premiums, but if that value underperforms, you'll need to cover the shortfall. Missed payments or poor policy management can lead to higher costs or even a lapse in coverage.

Before buying, weigh your financial goals, risk tolerance and how involved you want to be in managing your policy. Universal life offers long-term flexibility, but that flexibility comes at a price. It also often requires more hands-on oversight than other types of life insurance.

Universal Life Policy Management

Managing your universal life policy requires regular monitoring and adjustments to help keep your coverage on track, prevent policy lapse and maximize cash value growth over time.

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    Annual Policy Review Checklist

    Review your annual statement to verify cash value growth rates, compare actual performance against projections, and confirm your death benefit still meets your needs. Check if premium payments remain adequate to cover the increasing cost of insurance charges, especially as you age. Evaluate whether your beneficiary designations are current and reflect any major life changes like marriage, divorce, or new children.

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    Warning Signs of Policy Underperformance

    Watch for declining cash values, which indicate premiums aren't covering costs. If your policy's projected lapse date moves closer, you'll need to increase payments. Interest crediting rates consistently below 3% suggest poor performance compared to market alternatives. Rising cost of insurance charges without corresponding premium adjustments can drain cash value quickly.

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    Cash Value Optimization Strategies

    Make additional premium payments during high-earning years to build cash value reserves. Consider reducing death benefits if your insurance needs have decreased, which lowers the cost of insurance charges. Time major withdrawals carefully to avoid depleting cash value during market downturns.

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    Policy Lapse Prevention

    Set up automatic premium payments to avoid missed payments. Maintain cash value reserves equal to at least two years of the cost of insurance charges. Schedule annual policy reviews with your insurance agent to identify potential issues before they become critical.

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Universal Life Coverage: Bottom Line

On this page, we explained how universal life insurance combines permanent coverage with flexible premiums and an investment component. It gives policyholders more control than whole life, but also introduces more complexity and risk.

This type of policy may work well if you want long-term protection and are comfortable managing cash value performance over time. Before buying, make sure the potential benefits align with your financial goals and your willingness to monitor and adjust your policy as needed.

How Does Universal Life Insurance Work: FAQ

Have questions about universal life insurance? Here are answers to the most common questions to help you decide if it's right for you.

What is universal life insurance?

How does universal life insurance work?

What are the two components of a universal policy?

How much is universal life insurance?

Do universal life insurance premiums increase with age?

Can you cash out a universal life insurance policy?

What happens to the cash value in a universal life policy when the policyholder dies?

What are the disadvantages of universal life insurance?

Is universal life insurance a good investment strategy?

What is a guaranteed universal life insurance?

Who should buy indexed universal life insurance?

How much does indexed universal life insurance cost?

Should you choose term or permanent life insurance?

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

Which is better: whole life or universal life insurance?

What is the type of insurance in the insurance component of a universal life policy?

What type of premium do both universal life and variable universal life policies have?

Is universal life insurance term or whole?

What is the difference between term and universal life insurance?

Universal Life Insurance Quotes: Our Review Methodology

To help readers understand the cost and value of universal life insurance, MoneyGeek used a consistent, data-backed approach across multiple insurers and policy types.

Why You Can Trust MoneyGeek? We gathered and reviewed over 1,400 life insurance quotes and policy details using a standardized evaluation system. Our scoring incorporated both pricing and product features to identify insurers that offer flexibility, financial strength and broad consumer value.

Data Recency

All pricing, product information and company data were last updated in 2025.

How We Rated Universal Life Insurance Companies

We used a five-part scoring model to evaluate universal life insurance providers. Each company received up to five points per category, resulting in a final MoneyGeek score out of 100.

Scoring Categories for Universal Life Insurance:

  • Financial Stability: 30%
  • Customer Satisfaction: 25%
  • Buying Process: 20%
  • Product Diversity: 15%
  • Affordability: 10%

What Our Scores Include:

  • Quote data for various universal life products
  • AM Best ratings and insurer longevity
  • Complaint data from the National Association of Insurance Commissioners (2020–2022)
  • Online application and policy management features
  • Availability of product types, including traditional UL, IUL, VUL and no-lapse guaranteed UL

Sample Customer Profile Used for Quotes

We collected quotes using a default profile of a 40-year-old male, nonsmoker, in excellent health, 5'11", 175 lbs. We also adjusted quotes by age, gender, health rating and coverage amount to reflect different consumer needs.

How We Handled the Data

We analyzed pricing trends and policy structures across the data set to surface the most competitive and reliable offerings. While actual quotes will vary by individual, our process reflects real-world pricing patterns and product differences.

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About Mandy Sleight

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Mandy Sleight is a licensed property, casualty, life and health insurance agent with 20 years of experience in the industry. She has worked for major insurance companies like State Farm and Nationwide, and most recently as the Operations Coordinator for a startup employee benefits company.

Sleight holds a business administration and management degree from the University of Baltimore and a master's in business administration from Southern New Hampshire University. She uses her vast knowledge of insurance and personal finance to create easy-to-understand and engaging content to help readers make smarter choices with their budgets and finances.

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