What Is Universal Life Insurance: Pros, Cons & Who Should Buy

Universal life insurance is a type of permanent life insurance. It offers lifetime coverage but has the added advantages of flexible payments and a death benefit. Should your situation change, your universal life policy can adapt to those changes. Find out how universal life works and the pros and cons of universal life insurance to decide if it’s your best choice for coverage.

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Last Updated: 5/30/2022
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Universal life insurance — sometimes called "adjustable life insurance" — is one of the most flexible types of permanent life insurance. However, it's also riskier and more complex than whole life.

This type of coverage provides a death benefit plus a cash value component or savings. While whole life has a level death benefit and premium, universal life offers flexible premiums and the ability to adjust your death benefit as circumstances change. You also have more control over where your cash value is invested.

If you plan to use life insurance as part of your investment plan, universal life is a better choice than whole life. Learn more about this flexible option and get expert advice on how to get the most out of your investments.

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Key Takeaways

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Compared to whole life insurance, universal life insurance offers more flexibility in its death benefit and premiums.

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Adding a no-lapse guarantee rider can increase premiums, but it also offers policy protection to avoid lapsing if a payment is late or not enough to cover costs.

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A universal life policy requires monitoring to ensure the investment account meets financial goals.

What Is Universal Life Insurance?

Though universal life insurance is similar to whole life, it offers more ability to make changes as your needs and financial situation change. The features listed below outline how universal life insurance differs from whole life to help you decide which type of permanent life insurance is best for you.

Flexible Premiums

Universal life provides the opportunity to pay more, less or even skip payments based on your current financial situation. However, your amount of flexibility may depend on your cash value amount, current interest rate, and whether or not you have any loans or withdrawals. Typically, you can increase your premiums up to certain IRS guidelines or reduce them within specified minimum premium limits.

Adjustable Death Benefit

With a traditional whole life policy, your death benefit will stay the same unless an outstanding loan balance is present when paid. You can reduce and increase the benefit within specified plan limits; however, you may be subject to underwriting for significant increases or minimums and charges for decreases.

Level or Increasing Death Benefit

When you buy a universal life insurance policy, you can add a rider or set up the policy to include the cash value as part of the death benefit. While this can increase your premiums, it offers a larger death benefit to your beneficiary after you pass away. For example, if you have a $300,000 policy with a $50,000 account value, your beneficiary will receive $350,000 when you die.

Secondary, or No-Lapse, Guarantee

Some policies have this built-in, while others offer it for an additional premium. Typically, a UL policy can lapse under certain circumstances, such as a rise in administrative expenses, low premiums that aren’t enough to keep the policy from lapsing or interest rates falling below expectations. This option means your policy will remain in force for a specified period of time, regardless of those circumstances. Taking out a loan, partial surrenders or not paying premiums may result in the loss of this benefit and a lapse in protection, however.

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How Does Universal Life Work?

Universal life insurance offers flexibility with lifelong protection. However, learning about the different components and costs associated with this life insurance product is crucial to understanding if it's right for you:

  • Premiums: The amount you pay into the life insurance policy. Although premiums for universal life are adjustable after your initial payment, many companies have a minimum premium to cover expenses, taxes, and your policy's cost.
  • Interest: If the insurance company's portfolio earns more than the guaranteed interest rate, that difference is credited to your policy value.
  • Premium Expense Charge: This is the amount deducted from your premium payments to cover costs of insurance mortality, fees, commissions and any overhead. The balance goes toward the policy cash value.
  • Cost of Insurance: These deductions are taken from the policy value every month. They cover the death benefit, any riders you purchase and supplemental benefits.
  • Administrative Expenses: This is deducted monthly from the policy value and is used to maintain the policy. Administrative fees usually cover things such as accounting and record keeping.
  • Surrender Charge: If you surrender your policy during the surrender charge period or loans or withdrawals are made against it, your policy is reduced by this amount. Specific details regarding length and amount vary by plan.

Types of Universal Life Insurance

There are several different types of universal life insurance to choose from, including non-guaranteed universal life, guaranteed universal life, indexed universal life and variable universal life. The best type of coverage for you will vary depending on your financial goals and needs.

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Traditional or Non-Guaranteed Universal Life

The traditional or non-guaranteed universal life policy is the most straightforward and affordable type of universal life. You get a cash value savings account, flexible premiums and death benefit option, but no guarantee that the policy won’t lapse if you make changes. If you want to save on your premiums, traditional universal life may be a good option. Still, you’ll have to ensure any changes made won’t cause the policy to lapse because you didn’t pay enough in premiums to keep the policy in force.

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No Lapse Guaranteed Universal Life

With a no-lapse guaranteed universal life policy, you get everything included in traditional universal life, with added assurance the policy won’t lapse. A set minimum premium must be paid based on your coverage amount to ensure the policy won’t lapse. If you don’t want to monitor your policy closely but still want the features of a universal life insurance policy, this may be a better fit.

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Indexed Universal Life

An indexed universal life policy allows you to grow your cash value faster by placing cash in a market index fund. This differs from traditional universal life, which typically has a modest interest rate and slowly accumulates cash value. Index universal life policies have a minimum guarantee of 0-1%, though this varies by company. You should only use this fund if you understand the stock market or are working closely with a trusted financial advisor, as the policy could lapse if it doesn’t meet target premiums or its value isn’t enough to pay costs and fees.

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Variable Universal Life

Similar to index universal life, a variable universal life policy can speed up cash value growth through investments. Variable universal life policies offer more flexibility, with cash value invested into indexes, money market accounts or stocks. Investments can also be mixed, allowing faster growth, though there is typically a cap on the amount you will receive. Like index universal life, only the savviest investors should consider variable universal life, as the potential for lapsing the policy is the greatest with this universal life product.

Pros and Cons of Universal Life Insurance

Universal life insurance can prove very profitable over time, but it may not be the best option for everyone. Below are some of the pros and cons of universal life insurance compared to whole life.

Pros of Universal Life Insurance

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    Flexible Premiums

    Universal life insurance offers long-term coverage, with lower and more flexible premiums than whole life insurance. After your first payment, you'll have the ability to pay your premium at any time, in any amount, within certain limitations.

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    Cash Value Can Cover Higher Premiums

    This policy’s cash value works similarly to a Roth IRA; you can put in more money in the early years and let it accumulate. If you pay higher premiums early on in your policy, you'll likely build up enough cash value to supplement increased premiums as you age.

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    Control Over Investments

    Depending on your policy details, your insurance company may give you choices for where to invest your policy’s cash value portion. Your options may include an equity index strategy, a one-year term deposit or a general interest account.

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    No Cap on Returns

    Universal life insurance policies use a money market-type investment that pays a market rate of return. If the market is strong, universal life insurance policies may yield much higher returns than fixed-rate whole life insurance policies. However, as with most investments, returns are not guaranteed.

Cons of Universal Life Insurance

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    High Premiums

    You can choose how much to pay based on your current financial situation, but the actual cost of insurance will continue to increase as you age. For example, you'll need to pay premiums that are much higher than your cost of insurance in the first years of your policy to build up a cash value to dip into once your cost of insurance exceeds your budgeted premium. If you don't, the policy could lapse, especially if it doesn’t have a no-lapse guarantee clause.

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    Must Monitor Policy’s Cash Value

    During the sales process, agents will typically provide illustrations of how your savings could build, but these estimates are not guaranteed. Keeping track of how your cash value is doing and frequently asking your insurance company for illustrations is crucial to ensure you're getting the best possible outcome. If you don't review these illustrations and make adjustments accordingly, the cost of your policy could skyrocket.

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    Potential Negative Returns

    While universal life is a form of permanent life insurance, the policy will stay in effect only as long as the cash value is enough to cover the cost of insurance — unless you have a no-lapse guarantee. This means the market could work against you, and some policies allow the insurance company to dip into your cash value to recoup losses. Even worse, when your cash value hits $0, your provider can require you to make up the difference in the death benefit premiums or risk the policy expiring with no value. Your policy could lapse if interest rates fall below projections or insurance or administrative expenses increase. Make sure you understand the terms of your policy and your comfort level with investing in the market before committing to this type of coverage.

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    Conservative Interest Rates

    While interest rates are dependent on the market, they can be relatively conservative, meaning it could take a significant amount of time for your policy to accumulate cash value.

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    Detailed Stipulations

    Some plans offer a "no-lapse" guarantee, which means the policy is always in effect. However, to get this guarantee, a company may require you to make payments on time, even going so far as to cancel policies if you pay just one day late.

How Much Does Universal Life Cost?

Like other types of life insurance, the cost of universal life insurance is based on how much coverage you need and which universal life policy you choose. Personal data also matters, like your:

  • Age
  • Health status
  • Smoking status
  • Lifestyle and hobbies
  • Occupation
  • ZIP code

With a permanent life insurance policy, your insurance coverage is higher, so how much you pay is, too. Choosing a no-lapse guarantee universal life policy will cost more than a traditional policy, while indexed universal life or variable universal life cost even more. However, the ability to invest cash value can sometimes offset the increased cost if you use the growth to pay premiums or lower your death benefit.

If you’re considering buying universal life, we recommend working with a knowledgeable financial advisor to get a better idea of average premiums. They can help you navigate the available options and choose which policy and conveniences are best for your circumstances. This type of life insurance is more complicated than whole life, and the risk of lapsing is greater, so be sure you understand what you’re buying before you commit.

Compare Life Insurance Rates

Ensure you’re getting the best rate for your life insurance. Compare quotes from top providers to find the most affordable life insurance coverage for your needs.

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Insurance Rates

Should You Buy Universal Life Insurance?

Depending on your life insurance needs, universal life insurance may be a good fit. This type of life insurance offers more flexibility than whole life but may require monitoring for lapse concerns — unless you get the no-lapse guarantee. Consider these buyer profiles to decide if universal life is the best choice.

Individuals That Benefit Most from Term Life Coverage
  • Buyer Profile
    How They Benefit
  • Young, Newlywed Couples
    With time and health on their side, a young newlywed couple could get the best rates for universal life insurance. The couple could use universal life to build cash value and, with a no-lapse guarantee, make adjustments to the death benefit or premiums as needed. For instance, a young couple could make larger payments initially and then increase the death benefit or lower the premiums once they start having children. The cash value can be used in many ways, like paying for childcare or allowing one parent to stay home while the baby is young.
  • Business Owners
    Business owners can choose the universal life policy that best suits their goals. The savvy investor could pick an index universal or variable universal life policy to get fast cash value growth, then allow the value to pay premiums down the line. Or, the cash value could be used to finance business expenses or buy more life insurance.
  • Sole Financial Providers
    Sole providers keep their families financially afloat. The flexibility offered by a universal life policy can allow premium adjustments that help families weather financial hardships while the sole financial provider is still alive.
  • Individuals With Significant Debts
    The more debt an individual has, the greater their need for life insurance. Universal life flexibility means as debts get paid down, policyholders can decrease their death benefit and save on premiums. With an index universal or variable universal policy, the cash value growth can be used to pay off debt faster.
  • Stay-at-Home Parents
    Stay-at-home parents may not get paid, but their role in the home would be costly to replace. As needs change and the family expands, the 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 the freedom to choose to stay home or return to work. The policy’s cash value can also be used for debts or expenses or to pay premiums.

Whole vs. Universal Life Insurance

If you want permanent life insurance coverage, you may struggle to choose between whole life and universal life insurance. Deciding if whole life or universal life is best for you is a personal preference based on your financial goals and income.

Generally speaking, universal life might be a better option if you're interested in whole life, but also:

  • Have financial goals you wish to meet using permanent life insurance.
  • Are more savvy and comfortable with investments.
  • Have a high income and can pay larger premiums upfront to build cash value (or cover a higher cost of insurance when you're older).
  • Are more interested in using life insurance for estate planning.

Frequently Asked Questions About Universal Life

Before choosing a life insurance policy, consider which plan works best for your needs and financial goals. MoneyGeek answered some of the most common questions people have about universal life insurance to help you make the best choice for you and your family’s future.

About the Author


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Mandy Sleight is a professional freelance writer and licensed insurance agent. She has her property, casualty, life, and health licenses and has been working in the industry since 2005. Mandy has worked for well-known insurance companies like State Farm and Nationwide Insurance, and most recently as the Operations Coordinator for a start-up employee benefits company.

Mandy earned her Bachelor of Science degree in Business Administration and Management from the University of Baltimore and her Master in Business Administration from Southern New Hampshire University. She uses her vast knowledge of the insurance industry and personal finance combined with her writing background to create easy-to-understand and engaging content to help readers make smarter choices with their budget and finances.