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.
Reviewed by Tony Steuer

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If you need life insurance that can last your lifetime, builds cash value and offers flexibility in payments and death benefits, universal life could be the right choice.

What is universal life insurance?

Universal life insurance is a type of permanent life insurance, and most insurers provide coverage up until age 95 or 120. Also known as “flexible premium adjustable life insurance,” it offers flexibility that other permanent policies — like whole life insurance — don’t. For example, you can change the amount you pay in premiums, which may be appealing to those with fluctuating incomes.

The cash value account earns interest based on a variable rate set by the insurer. Once you’ve earned enough cash value, you can begin to borrow against your policy.

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 component. 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

The main perk of universal life insurance is the ability to adjust premiums. These policies allow you to pay more than the “scheduled premium,” which is the amount of money due each payment period. If you choose to pay extra, the additional funds go into your cash account, increasing its value.

Alternatively, you can pay less than the scheduled premium and draw from your cash value to cover the difference. If you do this, make sure you have sufficient cash value to pay your premiums or else your coverage may lapse.

Death benefit

You usually have the option to decrease your death benefit, which can be handy if you no longer need as much coverage. Some insurers also allow you to increase your coverage if you qualify, though this option is not as common.

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

  • 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 in the policy’s cash value portion to help pay premiums, 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 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, paying less premiums can put you at risk of a policy lapse, so check with a financial advisor before making any significant 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 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 rate set by your insurer, which can change frequently.

Disadvantages of universal life

Universal life’s benefits are also its disadvantages.

  • Requires you to monitor your policy. 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. It may also lapse, leaving you with no life insurance.

  • More exposure to risk. 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.

  • Rising costs. Even if your premium remains steady over time, the underlying cost to insure you rises as you age. In the early years of a universal life policy, part of your premium is used to pay this expense, typically called the mortality charge or the cost of insurance. In later years, your premium alone may not cover the increasing expense, and the shortfall will come from your cash value.

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. Note this isn't an apples-to-apples comparison as the policies are different — the universal life policy would likely have less cash value than the whole life policy.

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 doesn’t require the same hands-on approach as straight universal life insurance, but it offers some of the flexibility. Some insurers allow you to increase or decrease your coverage amount if you qualify, but there is minimal — if any — cash value.

  • 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 specify 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, but it also comes with greater risk as a result.

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 an additional premium.

  • No lapse guarantee. As long as you promptly pay the annual amount required to maintain the guarantee — which may be higher than the billed minimum premium to keep the policy in force — your death benefit will remain in place, even if your cash value drops.

  • Waiver of cost of insurance. This pauses premium payments if you become disabled. The rider keeps your policy in force, but it won’t contribute any funds to the cash value.

  • Accelerated death benefit. This allows you to access some or all of your death benefit while you’re still alive if you’re diagnosed with a terminal, critical or chronic illness. The terms of the rider vary by insurer, 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 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.

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, it’s a good idea to consult a fee-based life insurance consultant, and you can usually find one through an online search. These experts can help you to better understand how the company’s products differ and which one is right for your long-term goals.

Frequently asked questions

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, you may end up making several large payments to just keep the coverage.

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.

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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