Having life insurance doesn’t have to be a one-size-fits-all experience. Universal life insurance allows you to make certain changes to the policy to better fit your needs. But knowing how this works requires understanding the universal life insurance definition. So let’s talk about what universal life is; explore what you can do with the policy’s premium, savings feature, and death benefit; go over some of the pros and cons; look at different types of universal life policies; and discuss who this insurance might be a good fit for.

What Is Universal Life Insurance?

Universal life, also known as adjustable life, is a permanent life insurance product that combines term insurance with a savings account that earns tax-deferred interest at rates that depend on what type of universal life policy it is and how your premium payments are invested. Universal life, which was created to provide policy holders with more flexibility, is really a hybrid of whole life insurance that combines income protection and long-term investment features. The plans are flexible because you can increase or decrease the death benefit amount and make changes to how you pay premiums.

Universal Life Insurance Premiums: How They Work

  • When you pay premiums, a part is used to pay the costs of providing you with coverage, and the rest is invested by the insurance company to build cash value.
  • The flexibility of universal life means you don’t have to make fixed payments on a regular basis.
  • You can decide how much and when you want to pay (subject to some limitations), which makes the premium variable.
  • The ability to change your premium payment is only available once your policy has built up enough cash value and after you have made your first regular premium payment.
  • You can pay premiums out-of-pocket or use your cash value to pay premiums.

Universal Life Cash Value: What’s It About?

Maintaining a positive amount of cash value is very important with a universal life insurance policy. If you pay smaller regular premiums, or decide to use the policy’s cash value to pay premiums, the policy may run out of cash value. If there is no cash value left to cover the cost of the life insurance policy, and you don’t start paying premiums again, your coverage will end. But depending on the insurance company, there may be a guarantee that your coverage will remain in force even if the cash value isn’t enough to pay for the policy.


Building cash value: The cash value in this type of policy grows at a variable interest rate that’s based on the performance of the insurance company’s investment accounts your cash value is kept in. The interest rate changes monthly, but it is guaranteed not to fall below the minimum rate the insurance company sets. Variable rates can mean you will earn higher interest, which will make your cash value grow faster. If the interest in the company’s investment accounts doesn’t grow as fast, then you will get the minimum rate of return.

Taking out a loan on the cash value: You can borrow against the cash value in your policy just as you would with other types of permanent life products. When you borrow against your policy, the loan you get is from the insurance company, and your cash value is only used as collateral. You don’t have to qualify to take out a loan, and it doesn’t have to be repaid. If you decide not to repay, the interest on the loan will get larger and reduce your cash value, which may cause the policy to lapse. If the loan is left unpaid when you die, the amount plus interest will be deducted from the death benefit, and your beneficiaries will receive less money.

Withdrawing money from the cash value: Universal life insurance lets you make a partial withdrawal of the cash value, which is usually tax free. Some policies allow you to withdraw up to 90 percent of the cash value, which is considered a permanent withdrawal. Permanent withdrawals are subject to taxes and will also decrease the policy’s death benefit. In most cases, you are not allowed to withdraw money from the cash value in the first few years of the policy’s life.

How Universal Life Death Benefit Works

You can change your death benefit to fit your needs. For instance, if you need to cut back on household spending, you can reduce your death benefit so that you will pay less in premiums. The insurance company sets the minimum amount of death benefit you have to maintain to keep the policy active.

You can also increase the death benefit, but this usually requires passing a medical exam. Increasing the death benefit will result in an increase in premiums. Before you make changes to your policy benefits or enroll in a plan, it’s good idea to learn about a universal life insurance calculator so you can estimate your coverage needs.

A universal life policy offers two death benefit options: level and enhanced.

  • Level death benefit: This option guarantees that your beneficiary will receive the minimum amount of death benefit that the insurance company sets. The amount you pay in premiums with a level death benefit depends on how much cash value you have in the policy. Remember, a universal life insurance policy’s cash value can be used to pay premiums.
  • Enhanced death benefit: Under this option, your beneficiary receives both the death benefit and the cash value. So if the death benefit is $500,000, and the cash value is $100,000, a total of $600,000 would be paid out to your beneficiary upon your death (granted there are no outstanding loans). This enhanced feature will usually cost more.

Quick Comparison of Universal Life Pros and Cons

As with all types of life insurance, you have to decide if the advantages make up for the disadvantages of the plan you choose. Although there are some cons with universal life, one of pros is that insurance companies provide policy holders with an annual statement that breaks down all the expenses your premium payments cover and the amount of interest that goes into your cash value. Looking at more of these pros and cons side-by-side may help you better understand how universal life insurance policies work.

Pros Cons
  • Can pay less or more than the premium once your policy has cash value
  • Paying less in premiums can make your policy lose cash value
  • Can use cash value to pay premiums
  • If cash value isn’t enough to cover premiums, and you don’t pay premiums again, the policy will lapse
  • Some policies may continue even when the cash value ends
  • Not every policy may have this guarantee – policy usually ends once cash value is used up without further premium payments
  • Variable interest means you can earn more cash value if the interest stays at a higher rate
  • Interest rate changes month-to-month, so a higher rate of return is not guaranteed
  • Can change death benefit amount to be less or more to fit your financial needs
  • Increasing the death benefit often means taking a medical exam

Are There Different Types of Universal Life Insurance Policies?

Yes. There are three main types: fixed universal life, fixed-indexed universal life, and variable universal life. All three involve some risk because the interest the cash value earns depends on either the performance of the insurance company’s investment portfolio, an index account, or the stock market.

Fixed universal life: This type of universal life insurance policy is typically the lowest risk because the growth of the interest is based on the insurance company’s overall investment portfolio. According to LifeHealthPro, many insurance companies invest most of their portfolio in fairly safe bonds. But the downside of safer bonds is that you usually get a lower rate of return, which can mean your cash value won’t grow as fast.

Fixed-indexed universal life: This is usually the middle ground between the least risky and the most risky type of universal life product. An indexed policy lets you decide the percentage of cash value that you want to invest. While the cash value isn’t directly invested in the stock market, the growth of the interest is based on the financial value of one or more indexes, such as the Nasdaq-100 and Standard & Poor’s (S&P) 500. One of the pros with this type of policy is that if you make a high return, that return is locked in. So, if the market goes down at a later time, you won’t lose the interest you’ve already earned. Because these policies aren’t managed, the cost is usually less expensive.

senior-couple-using-table-computer-at-outdoor-cafeVariable universal life: This is typically the most risky type of universal life insurance because the rate of return is tied to the performance of managed funds. This is both the advantage and disadvantage. The big payoff is that if investment funds (money market mutual funds, stocks, or bonds) perform well, the interest gained can be more than what you would get in the other two types. This means you have the potential to build a large amount of cash value quickly. But if funds don’t perform well, you may end up paying higher premiums (because the investment part of the policy is managed) only to not get the high return you were expecting.

Who Should Get Universal Life?

With understanding life insurance, there are certain types that industry sources may recommended as being better for certain groups of people. This article can give you a general idea of who universal life coverage may be a good fit for.

One thing to keep in mind with all permanent life products, such as universal life, is that the cash value feature typically makes it more expensive than temporary or term life insurance. So those who should get a universal life policy are generally those who have the income to afford a policy with higher premiums in exchange for the potential to build a lot of cash value.

High-income earners and those looking for more flexibility: According to an article from LifeHealthPro, an indexed universal life (IUL) policy may work best for people whose incomes are too high to qualify for a Roth IRA and who find their other tax-deferred accounts to be inflexible. An IUL policy may be a good fit for these types of people because they can put as much money as they want into the policy to build a large cash value, and they can withdraw money from the policy at any age without a penalty.

Retirees: For those who have maxed out the money in their retirement accounts, LifeHealthPro also mentions that an IUL policy may be a suitable option. Overall, it is suggested that universal life can be a good fit for the wealthy baby boomer market or those nearing or already in retirement. This is because the policy may provide for a long-term, tax-free stream of retirement income when premiums are paid and when certain insurance riders are added to the policy, such as a longevity rider.

Choosing a Universal Life Insurance Policy

Although this article covers many of the basic facts about universal life, it won’t answer every question you may have about getting a policy. But not to worry! HealthMarkets’ knowledgeable insurance agents can help answer questions you may have about universal life insurance. Just give us a call 24/7 at (800) 917-4169, and we will be happy to help.

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