Universal Life Insurance: Pros, Cons and How It Works

Universal life insurance offers flexibility but comes with more responsibility than a term or whole life policy.

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If you need life insurance that lasts your lifetime, builds cash value and offers flexibility in payments and benefits, universal life could be the right choice. Unlike term life, universal life insurance doesn’t expire — it covers you until death. And unlike whole life, you’ll earn market-based interest on your cash value account.

But with more control comes more responsibility. If that doesn’t sound like a burden to you, universal life can be a good choice.

What is universal life insurance?

Universal life insurance is a type of permanent life insurance, which covers you until death, just like a whole life policy. It’s called "universal" because it’s meant to be a product for anyone with any need. High premiums, low premiums, changing coverage — you name it — universal policies are supposed to allow for it.

The cash value account earns interest based on market rates, which can go up or down depending on how the market performs.

How does universal life insurance work?

Universal life policies have two main parts. The first is the insurance. This is the part that pays out the death benefit when you die.

The second part is a cash value account. When you make a premium payment, the insurance company takes out the cost of the insurance, as well as any administrative fees, and puts the rest into your cash value account.

Premiums

Universal life policies allow you to pay more than the minimum premium. The remainder goes into your cash account, increasing its value. Alternatively, you can pay less than the minimum premium and draw from your cash account to cover the difference. If you do this, make sure you have enough funds in the account to pay your premiums or else your coverage may lapse.

Death benefit

You have the option to increase — if you qualify — or decrease your death benefit, which can be handy if you no longer need as much coverage, or want more.

One of the biggest decisions you'll make in a universal life policy is how your death benefit is paid out. You have two choices:

  • Level death benefit: The death benefit remains the same through the life of the policy. For example, if you buy $100,000 of coverage and build up $60,000 in the policy’s cash value account to help pay premiums, your beneficiaries receive $100,000 when you die.

  • Combined death benefit: Your cash value account is added to the death benefit. So, in the previous example, your beneficiaries would get $160,000 — the death benefit plus the cash value. This option typically requires higher premiums than the first.

Universal life insurance: Pros and cons

Weighing the pros and cons of a universal life policy can help you decide if this type of insurance is right for you.

Advantages of universal life

The major benefits of universal life are flexibility and cash value growth.

  • Flexible premiums. Universal policies allow you to change the size and frequency of your payments, which can be handy when times are lean. However, underpaying may result in a decrease in coverage, so check with a financial advisor before making any changes.

  • Flexible death benefit. You have the option to increase the death benefit if you need more, but you’ll likely need to take a life insurance medical exam to qualify for the extra coverage. If you want to decrease your death benefit, you can typically do so after the policy has been in force for a few years.

  • Potential cash value growth. The money in your cash value account will earn interest at the market rate based on the insurer’s general account investments. This means it’s possible to earn more than you would in a whole life policy, which has a flat guaranteed rate.

Disadvantages of universal life

Universal life’s benefits are also its disadvantages.

  • Increased responsibility. If you don’t pay attention to the value of your account, it may become underfunded, which could leave you with a series of large payments to maintain the coverage you signed up for.

  • Increased risk. Market rates bring volatility. When interest rates are rising, universal life insurance looks like a great product. But if they drop, your cash value account may not perform as you’d hoped. Universal life insurance policies typically come with guaranteed minimum interest rates, so they won’t drop below a certain amount if the market crashes.

Universal life insurance vs. whole life

Whole life policies are a type of permanent coverage, which means they last your entire life. But, unlike universal life, whole life policies have steady premiums and death benefits throughout the length of the policy. If you want to adjust your coverage and premium payment over time, you may want to consider universal life. In contrast, if you want a permanent policy that you don’t need to monitor, whole life may be the simpler option.

How much does universal life insurance cost?

Here are average annual premiums for a $500,000 universal life policy compared with whole life.

Person covered

Universal life

Whole life

Male, 30

$1,722

$4,265

Female, 30

$1,499

$3,753

Male, 40

$2,630

$6,490

Female, 40

$2,243

$5,607

Male, 50

$4,311

$10,273

Female, 50

$3,837

$8,798

Male, 60

$7,351

$17,040

Female, 60

$6,299

$14,465

Source for all rates: Quotacy. Average of lowest three rates for each age for healthy applicants. Age of the person covered is at issuance.

Other types of universal life

There are three other types of universal life policies you may want to consider.

  • Guaranteed universal life insurance removes the investment component of universal life, but keeps some of the flexibility. You can still increase or decrease your coverage amount, but the cash value account has minimal growth.

  • Indexed universal life insurance works similarly to a standard universal life policy, but the cash value account is based on the performance of stock indexes like the S&P 500 and Nasdaq Composite.

  • Variable universal life insurance has the same flexibility as universal life but gives you more options for investing the cash value account, which generally means greater risk.

Universal life policy riders

There are several riders your insurance company may offer for a universal life policy. Life insurance riders are add-ons you can use to personalize your policy. They might add coverage features or guarantees, but they’re typically optional, and some come with a fee.

  • No lapse guarantee. Any life insurance policy exposed to the market may not work out as advertised. You might end up owing more to your policy than you ever imagined. No lapse guarantees make it so that, as long as you pay a minimum premium, your death benefit will remain in place, even as your account value drops.

  • Waiver of premium. This lets you skip payments if you become disabled. It’s basically insurance for your insurance payments.

  • Accelerated death benefit. This allows you to access some or all of your death benefit ahead of time if you suffer a major medical setback — heart attack, stroke, etc. — or if you’re diagnosed with a terminal illness. Different insurance companies treat each condition separately, so check to see which illnesses will be covered by your insurer’s accelerated death benefit and how much it pays out.

  • Family riders. Child and spouse riders allow you to add coverage for additional members of your family under your universal life policy.

  • Accidental death. These riders increase the payout from your policy if you die in, or as a result of, an accident.

  • Guaranteed insurability. This allows you to increase the death benefit of your policy at specific life stages or policy anniversaries, without an exam or health questionnaire. For example, you could increase your death benefit when your child is born, even if you’ve developed a medical condition.

How to find the best universal life insurance company

Universal life policies are complex, so to find the right company, you’ll need to look for a few things.

First, you'll want a life insurance provider that’s financially strong so you'll know your cash value account is safe and your beneficiaries will receive a payout when you die. In most cases, you can find financial strength ratings for life insurance companies from A.M. Best or Standard & Poor's, but you may need a free login to check. NerdWallet doesn’t recommend insurers with a rating of B or lower from A.M. Best.

Second, you should find a company that offers the policy options you’re looking for — the riders above may not be available from each company. Universal life policies can be sold with different guaranteed minimum interest rates and various fee structures.

Finally, you should consult with a financial advisor — fee-only financial planners can help you here — to better understand how the company’s products differ and which one is right for your long-term goals.

Frequently asked questions
What are the disadvantages of universal life?

Universal policies typically do not have fixed interest rates, so they are less predictable than whole life insurance. If you miss a payment on a universal life policy or don’t contribute enough to the cash value account, you may end up making several large payments to just keep the coverage.

Is universal life insurance worth it?

If you want flexible premiums and permanent coverage, universal life insurance may be worth it. Be aware that universal life is typically more expensive than term life insurance, which is sufficient for most families.

What is group universal life insurance?

Group universal life insurance is a type of universal coverage sometimes offered to employees as part of their workplace benefits. Coverage details vary among employers and insurers.

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