What is Universal Life Insurance? Pros, Cons and Cost
Universal life insurance offers flexibility but requires a more hands-on approach than other permanent policies.
Many, or all, of the products featured on this page are from our advertising partners who compensate us when you take certain actions on our website or click to take an action on their website. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money.
If you need life insurance that can last your lifetime, build cash value and offer flexibility in payments and death benefits, a universal life policy could be worth considering. But this type of coverage isn’t right for everyone. Learn more about the pros and cons of universal life insurance before you start shopping.
» MORE: Compare life insurance quotes
What is universal life insurance?
Universal life insurance is a type of permanent life insurance, which means it offers lengthy coverage and builds cash value over time. Policies typically last until a certain age, such as 95 or 120.
This coverage offers flexibility that other permanent policies — like whole life insurance — don’t. For example, you can adjust the amount you pay in premiums, which may appeal to people like freelancers or business owners whose income can vary.
How does a universal life insurance policy work?
Universal life insurance: Key facts
Universal life policies work in a similar way to other permanent policies. In exchange for premiums, you typically get lifelong coverage and your beneficiaries receive a payout when you die. You also have the opportunity to build cash value and take out loans while you’re still alive.
However, universal life insurance has unique features that set it apart from other types of policies.
Universal life insurance cash value
When you make a premium payment, the insurance company takes out the cost of the insurance as well as any fees. The rest is added to your policy’s cash value, which can grow over time based on an interest rate set by the insurance company. Universal life policies come with a guaranteed minimum interest rate.
Universal life insurance premiums
The main perk of universal life insurance is the ability to adjust your premiums. You can pay more than the minimum premium, up to a certain limit, and the additional funds — minus any fees — are funneled into your cash value.
Alternatively, you can pay less than the minimum premium. If you do this, make sure you have enough cash value to cover the cost of insurance and other charges or else your coverage could lapse.
Universal life insurance death benefit
You usually have the option to decrease your life insurance death benefit, which can be handy if you no longer need as much coverage. Some insurers may allow you to increase your coverage, though this option is not as common.
In general, there are two types of death benefits to choose from:
Level death benefit. In most cases, the death benefit amount remains the same through the life of the policy. For example, if you buy $100,000 of coverage and build up $60,000 of cash value, your beneficiaries receive $100,000 when you die.
Increasing death benefit. Your cash value balance 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 comes with higher premiums.
Other types of universal life insurance
There are three other types of universal life policies you may want to consider.
Guaranteed universal life insurance doesn’t require the same hands-on approach as standard universal life insurance and is often described as a compromise between term and whole life. It offers lower rates because the cash value growth is minimal.
Indexed universal life insurance works similarly to a standard universal life policy, but the cash value is based on the performance of stock indexes like the S&P 500 and Nasdaq composite. In some cases, cash value will be placed in a fixed account unless you choose other investments.
Variable universal life insurance has a cash value portion that’s invested in various subaccounts of your choice. It has higher potential returns and losses, so it comes with greater risk.
Universal life insurance: Pros and cons
If you’re in the market for a permanent life insurance policy and the premiums fit your budget, universal life insurance offers a lot in the way of flexibility and potential returns. But it has downsides, too.
Weigh the pros and cons of a universal life policy to decide whether this type of insurance is right for you.
Advantages of universal life | |
|---|---|
Flexible premiums | Universal policies allow you to change the size and frequency of your payments, which can be handy when times are lean. However, paying less can put you at risk of a policy lapse, so check with a fee-based life insurance advisor before making changes to your premium payments. |
Flexible death benefit | Your policy may include the option to increase the death benefit if you need more, although you'll usually have to take a medical exam to qualify for extra coverage. If you want to decrease your death benefit, you can typically do so after the policy has been in force a few years. |
Potential cash value growth | The money in your cash value account will earn interest at the rate set by your insurer, and that rate can change frequently. |
Disadvantages of universal life | |
|---|---|
Requires you to monitor your policy | If you don’t pay attention to the cash value, the policy may become underfunded. This could mean making large payments to maintain the coverage you signed up for. |
More exposure to risk | When interest rates rise, your universal life insurance looks like a shrewd decision. But if rates drop, your cash value may not grow as you’d hoped. Fortunately, universal life insurance policies typically come with guaranteed minimum interest rates. |
Universal life insurance vs. whole life insurance
Similar to universal life, whole life policies are a type of permanent coverage, which means they can last your entire life. But, unlike universal life, whole life policies have fixed premiums and death benefits and offer consistent cash value growth.
So, if you want a permanent policy that you don’t need to monitor as closely, whole life may be the simpler option. If you want to adjust your coverage and premium payment over time, you may want to consider universal life.
And if you’re simply looking for affordable life insurance coverage, term life insurance is sufficient for most people. It can be used to cover the time period when your death and lost income would have the greatest financial impact on your family.
How much does universal life insurance cost?
Here are the average annual premiums for a $500,000 universal life policy compared with whole life.
Note this isn't an apples-to-apples comparison because the policies act differently. For example, the cash value of universal life policies is influenced by market conditions and can change over time. Whole life policies have a set, predictable cash value growth rate, which is part of what makes them a more expensive product.
Universal life vs. whole life insurance rates for men
Issue age | Universal life | Whole life |
|---|---|---|
30 | $2,174.33 | $4,311.33 |
40 | $3,101.33 | $6,387 |
50 | $5,048.67 | $10,068.67 |
60 | $8,556.67 | $16,697.67 |
Source: Covr Financial Technologies. Lowest three rates for each age averaged, as of February 25, 2025. | ||
Universal life vs. whole life insurance rates for women
Issue age | Universal life | Whole life |
|---|---|---|
30 | $1,857.33 | $3,958.67 |
40 | $2,698.33 | $5,859.67 |
50 | $4,563 | $9,037.33 |
60 | $7,544.33 | $12,829.33 |
Source: Covr Financial Technologies. Lowest three rates for each age averaged, as of February 25, 2025. | ||
» MORE: Average life insurance rates
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 or come with an additional cost.
How to find the best universal life insurance company
Universal life policies are complex, so to find the right company, focus on these three things:
Financial strength. You'll want a life insurance provider that’s financially strong so you'll know your cash value 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 AM Best or S&P Global Ratings, but you may need a free login to check. All of the insurers on NerdWallet’s list of the best life insurance companies have ratings of A+ or higher from AM Best.
Policy types. You should find a company that offers the policy options and riders you’re looking for. Premiums and fees for universal life policies can vary between companies, too.
Expert advice. Finally, it’s a good idea to consult a fee-only life insurance consultant.You can usually find one through an online search. These experts can help you to better understand how insurance policies differ.
See NerdWallet's list of the best universal life insurance companies.
ON THIS PAGE
ON THIS PAGE