Universal Life Insurance
Universal life insurance is permanent coverage built for flexibility. It offers adjustable premiums, a death benefit you can change, and a cash value account that can earn declared interest or market-linked returns depending on the subtype. As an umbrella for fixed UL, indexed UL (IUL), and variable UL (VUL), universal life lets you choose the blend of guarantees and growth potential that fits your goals.
Quick links
- What is Universal Life Insurance?
- How Does Universal Life Insurance Work?
- Types of Universal Life Insurance
- Examples: How Different Universal Life Policies Build Cash Value
- Universal Life Death Benefit Options
- What Is the Cost of Insurance (COI) in Universal Life?
- Pros and Cons of Universal Life Insurance
- Universal Life vs Whole Life vs Term Life
- How Much Does Universal Life Insurance Cost?
- What Can Cause a Universal Life Policy to Lapse?
- Is Universal Life Insurance Right for You?
- Using Universal Life Insurance for Retirement Planning
- FAQs on Universal Life Insurance
Key Takeaways
Universal life insurance is a type of permanent life insurance designed for flexibility.
Policies feature adjustable premiums, a death benefit that can be changed, and a cash value account with different growth methods depending on the subtype.
Common forms include fixed UL, indexed UL (IUL), and variable UL (VUL).
A universal life insurance policy may appeal to people who want lifelong coverage with more control and more options than whole life.
What is Universal Life Insurance?
A universal life (UL) insurance policy is a type of permanent life insurance that offers lifelong coverage with flexible premiums along with a savings component called cash value.
Universal life features adjustable premiums, death benefits that could change over time, and a cash value account that earns interest or market-linked returns depending on the subtype. UL serves as the umbrella category for three main types: fixed universal life, indexed universal life (IUL), and variable universal life (VUL). All share the same foundation of permanent protection along with flexibility.
How Does Universal Life Insurance Work?
What makes UL unique is its flexibility. You can adjust premiums and potentially even death benefits over time, and what sets each subtype apart is how that cash value grows. Here’s how it works:
- You pay monthly or annual premiums on your life insurance policy. Premiums cover the cost of insurance first, along with any charges and fees, and the remainder is directed to the cash value.
- Based on the universal policy type, the cash value is credited and invested differently. Fixed UL (minimum guarantee rate), Indexed UL (index-linked with caps, floor and participation rates), Variable UL (market-based subaccounts like mutual funds).
- Like all permanent policies, tax value grows tax-deferred, which can be useful to pay future premiums, borrow, or withdraw funds.
The premium payments are not fixed but flexible, meaning you can pay more or less over time, but ensure maintaining a substantial cash value to cover costs.
Unlike other life policy types, a universal life insurance policy may need a periodic review to ensure that the policy’s cash value is enough to cover its ongoing costs. If investment returns or credited interest are lower than expected, the cash value can deplete and policy may lapse.
Types of Universal Life Insurance
Universal life insurance is an umbrella category with several variations. Each kind of universal life insurance offers permanent protection, but work differently when it comes to how the cash value grows:
- Fixed universal life: Credits interest at a rate declared by the life insurance company. This option emphasizes stability and predictability, though growth is limited.
- Indexed universal life (IUL): Cash value growth is tied in part to a market index, with caps on gains and floors to prevent losses. It balances risk and protection.
- Variable universal life (VUL): Cash value is invested in sub-accounts similar to mutual funds. This approach offers the most growth potential but also carries the most risk, including the loss of principal.
- Guaranteed Universal Life: This policy type offers the least flexibility in comparison to other subtypes of universal life, as premiums, death benefits, and other features are typically not adjustable. It’s designed to offer a death benefit guarantee with predictable premiums. Unlike other subtypes, the focus is not on building cash value.
- Flexible universal life insurance: This isn’t a subtype per se, but is a broad term often used to describe the ability to adjust premiums, death benefits, and allocation choices across these policy types.
Read: Understanding Life Insurance Waiver of Premium Rider
Examples: How Different Universal Life Policies Build Cash Value
Each subtype of universal life accumulates cash value in different ways, and it’s important to understand how they work based on your particular situation and risk tolerance. (For these examples, we’re only looking at the portion of premiums applied to cash value.)
Fixed Universal Life Insurance Example
Selena wants lifelong coverage, but her risk tolerance is low, so she decides to purchase a fixed UL policy. She contributes $3,000 each year into her cash value. Her insurance company declares a 4% interest rate for the first two years, and in the third year the rate drops slightly to 3.5%. Her cash value grows steadily regardless of market conditions.
| Policy Year | Growth Credited | Result on Cash Value |
|---|---|---|
Year 1 | 4% | Steady growth |
Year 2 | 4% | Steady growth |
Year 3 | 3.5% | Slightly lower, steady growth |
Indexed Universal Life Insurance (IUL) Example
Jamal wants to protect his family with permanent coverage, but he’s a bit more risk tolerant than Selena. However, he wants to safeguard his cash value if the market experiences a down year. He purchases an indexed universal life insurance policy and his cash value is tied in part to a market index, but not directly invested in the market. Caps and floors shape his results, which protect against losses but also limit gains.
| Policy Year | Index Account Performance | Credited to Cash Value |
|---|---|---|
Year 1 | +8% | 8% (under 10% cap) |
Year 2 | – 12% | 0% (floor protection) |
Year 3 | +20% | 10% (capped) |
Variable Universal Life Insurance (VUL) Example
Taylor is very risk tolerant, and likes the idea of combining permanent protection for his family with investment options that can help supplement his retirement. He directs $3,000 per year into a VUL, allocating 70% to stock sub-accounts and 30% to bond sub-accounts. His returns rise and fall with market performance, without caps or floors.
| Policy Year | Market Performance | Result on Cash Value |
|---|---|---|
1 | Stocks +10%, Bonds +3% | 8% blended return |
2 | Stocks – 12%, Bonds +2% | – 8% blended return |
3 | Stocks +20%, Bonds +6% | 16% blended return |
These scenarios highlight the core trade-off within universal life insurance. All three policies provide permanent coverage and flexible premiums, but the way cash value grows depends on the subtype. Fixed UL offers stability, IUL balances protection with limited upside, and VUL reflects full market performance with both higher growth potential and greater risk
(Note: These examples are hypothetical and for illustration only. Actual results will vary by policy and insurer.)
Universal Life Death Benefit Options
As mentioned above, universal life insurance offers flexibility not just in premiums but also in death benefits. It typically offers two death benefit options that impact the policy’s structure, cash value treatment, and premium cost.
Option A: Level Death Benefit
In this case, the death benefit remains the same throughout the policy. The cash value growth is often not added to the total death benefit but used to support the policy and reduce the risk of lapse. The premium costs are often lower and cost-efficient over time in comparison to increasing death benefit.
Option B: Increasing Death Benefit
Here, the death benefit payout includes the policy’s face amount plus the total cash value accumulated. Though your beneficiaries may receive a larger benefit, the risk factor is often higher. Increased death benefits often lead to higher premiums.
Read: Why Did the Premium on my Life Insurance Go Up?
What Is the Cost of Insurance (COI) in Universal Life?
The cost of insurance (COI) in universal life insurance is the charge you pay to your insurer for providing coverage. It’s based on your risk profile. Here’s what you should know:
- Paying COI is essential to maintain the policy’s death benefit.
- The cost is deducted from your monthly or annual premiums, or sometimes from the policy’s cash value, if sufficient premiums are not paid.
- It’s calculated based on the net amount at risk, meaning the portion of the death benefit that’s not supported by the policy’s cash value. In general, the net amount at risk is the death benefit minus the cash value. It may vary over time.
- As you age, the cost often increases due to a higher risk factor. It’s also impacted by factors like health, gender, and policy type.
Remember, as COI increases, it can lead to cash value reductions, especially when you fail to pay your premiums, under-funding the policy. If at any point in time, the cash value is not enough, you may need to pay higher premiums to maintain the COI, or the policy could lapse. It’s good to review the changes in COI to manage your UL insurance strategically.
Pros and Cons of Universal Life Insurance
Beyond the subtype differences, every UL policy comes with advantages and disadvantages that apply more broadly. Understanding these trade-offs can help you decide if the flexibility is worth the added complexity and cost.
Advantages of Universal Life Insurance
- Flexible premiums: You can raise or lower contributions within limits, which can be helpful if your income changes.
- Adjustable death benefit: Coverage amounts may be increased or decreased as your needs evolve.
- Cash value growth: Premiums above insurance costs build cash value, which grows based on the subtype - fixed interest, index-linked credits, or market-based returns.
- Tax benefits: Cash value grows tax-deferred, and loans may be taken tax-free if the policy remains in force.
- Lifelong coverage: As long as the policy is properly funded, it can provide protection for your entire life.
Disadvantages of Universal Life Insurance
- Policy complexity: Understanding how premiums, costs, and cash value work together isn’t always straightforward.
- Costs can rise: Insurance charges often increase with age, requiring more funding later in life.
- Risk of lapse: If underfunded, the policy can lose cash value and even lapse.
- Fees reduce returns: Administrative fees, cost of insurance, and fund management charges (for VUL) can impact growth.
- Uncertain performance: Returns aren’t guaranteed, especially with IUL and VUL. Caps, floors, participation rates, and/or market swings can shape results.
Universal Life vs Whole Life vs Term Life
A universal life insurance policy offers permanent coverage, yet it’s different from a whole life policy. Whole life remains popular for people who value stability and guarantees. Universal life appeals to those who want lifelong coverage but also the ability to adapt their policy over time.
It’s comparable with whole and term life policies on various grounds, including coverage length, premium costs, and flexibility. Based on your personal situation and life goals, you may choose one amongst these. Here’s a general comparison between universal life, whole life, and term life policies.
| Features | Universal Life | Whole Life | Term Life |
|---|---|---|---|
Coverage | Lifelong coverage with flexible premium and cash value | Lifelong coverage with fixed premium and cash value | Fixed term coverage with level premium that stay the same for policy’s term (10, 20 or 30 years) |
Premium Costs | Flexible; costs can vary based on funding choices and policy costs | Often the highest costs | Typically lower and affordable |
Premium Flexibility | Yes (you can often pay more or less within limits) | No | No |
Cash Value Growth | Yes, growth often depends on interest crediting and policy charges | Yes, often predictable growth | No |
Death Benefit | Often adjustable | Typically fixed | Fixed |
Complexity | Comparatively high | Medium | Low |
Best For | Lifelong coverage with flexibility to adjust the costs and payout | Lifelong coverage with predictable cash value growth | Long-term coverage at affordable costs |
How Much Does Universal Life Insurance Cost?
The cost of a universal life insurance policy depends on age, health, coverage amount, and how the policy is structured. Premiums are flexible, but you must pay at least enough to cover insurance charges and fees, otherwise, the policy can lapse.
Universal Life Insurance Quotes
Compared to term life, UL is more expensive because it provides lifelong coverage and a cash value component. Whole life is usually the most expensive type of permanent insurance, since it offers guaranteed growth and fixed premiums. Universal life often falls somewhere in between, though costs can rise over time as insurance charges often increase with age.
Here are estimated average annual premiums for a $500,000 universal life policy¹.
| Age | Male | Female |
|---|---|---|
30 | $2,174.33 | $1,857.33 |
40 | $3,101.33 | $2,698.33 |
50 | $5,048.67 | $4,563 |
60 | $8,556.67 | $7,544.33 |
Other Factors Influencing Rates
Within the UL family, costs also vary by subtype. Fixed universal life tends to be the least expensive because it credits a declared interest rate. Indexed UL usually sits in the middle, with extra charges tied to index features. Variable UL is often the most expensive, since it adds fund management fees on top of insurance and policy costs. If you’re considering a UL policy, make sure you understand the fee structure before purchasing, as unexpected fees and expenses can impact your cash value growth.
Expert Tip
Is Universal Life Insurance a Good Option for People With Fluctuating Income?
Universal life insurance gives you lifelong coverage with room to adjust as your needs change. It can be a good option to consider if your income fluctuates and you use the flexibility to smartly strategize the premium payments. You can try paying more and building extra cash value in higher-income years so you can reduce your payments when your income drops. But make sure you always have substantial cash value to keep the policy active.
Senior Director Life Underwriting
What Can Cause a Universal Life Policy to Lapse?
Remember, policy lapse doesn’t happen suddenly, but after small issues have compounded over time. Here are some common reasons a universal life insurance policy may lapse.
- This policy comes with flexibility to adjust your premiums, but if you consistently pay less than what the policy needs to maintain the coverage, the gap is funded through cash value. When done repeatedly, the policy can be at risk.
- In this policy type, cash value growth is typically not guaranteed. If the interest crediting is lower than expected due to market performance, caps, or other policy terms, the policy growth may not be fast enough to sustain in the long run.
- Withdrawing funds out of your policy’s cash value not only reduces the death benefit for your beneficiaries but also risks a lapse if not managed properly. Make sure that there’s enough cash value left to support the base coverage.
- If you borrow against your policy’s cash value, failure of repayment can lead to a higher loan balance over time, which may again lead to policy lapse.
It’s good to review and monitor your universal life insurance policy from time to time. Notice any change in performance and warning signs like declining cash value, increasing required premiums, and funding shortfalls.
Is Universal Life Insurance Right for You?
The answer depends on your financial goals, budget, and comfort with flexibility. Universal life insurance provides a smart fit for some households, but it’s not the best choice for everyone.
Who Benefits Most from UL
- Families seeking lifelong coverage: UL provides permanent protection as long as the policy is funded.
- People with changing income or needs: Adjustable premiums and death benefits make it easier to adapt coverage over time.
- Savers who want flexibility: Policyholders can contribute extra toward cash value – saving more in years when income is up, and covering only the cost of insurance and fees when income is down.
- Those who want more control than whole life: UL allows more choices while still offering permanence.
When UL May Not Be a Good Fit
- Budget-conscious buyers: Term life insurance generally offers higher coverage amounts at a lower cost.
- People who prefer predictability: Whole life may be a better choice for those who want guaranteed growth and fixed premiums.
- Hands-off policyholders: UL requires monitoring to ensure the policy is funded properly and doesn’t lapse.
- Risk-averse investors (for VUL/IUL): If market exposure is uncomfortable, UL subtypes tied to indices or investments may not be ideal.
Using Universal Life Insurance for Retirement Planning
Universal life insurance is sometimes used as a supplemental tool for retirement planning. While it isn’t designed to replace tax-advantaged accounts like a 401(k) or IRA, the policy's cash value can grow tax-deferred and may be accessed through policy loans or withdrawals.
Some policyholders use UL to build an additional source of funds for expenses later in life. However, accessing cash value can reduce the death benefit and may create tax consequences if withdrawals exceed what you’ve paid in. The policy must also remain active otherwise loans or gains could become taxable.
Because of these factors, UL is usually best seen as a complement to, not a substitute for, traditional retirement savings.
FAQs on Universal Life Insurance
Universal life insurance is permanent coverage that lasts your whole life. It includes a death benefit to protect your family and a cash value account that can grow over time. The main difference from other policies is flexibility you can often adjust premiums, coverage amounts, and how cash value is credited.
Universal life insurance products work best for people who want permanent coverage and value flexibility. It’s often a fit for families with changing financial needs, or for individuals who like the idea of adjusting premiums or benefits as life changes. Those comfortable managing a policy over time usually get the most out of UL.
Cash value growth in the case of universal life insurance is linked to market returns, so the risk of lower returns is as high as the growth potential. It also offers flexibility to adjust premiums, but if the premiums are too low or returns are lower than expected, the policy may lapse.
Plus, fees and insurance charges may rise as you age. Returns on cash value aren’t guaranteed, especially with indexed or variable versions, so performance can be less predictable than whole life.
The cash value growth in a UL insurance is tax-deferred, but how the value grows depends on the policy type. If fixed UL, the interest is credited at a rate declared by the life insurance company. But for Indexed or Variable UL, growth depends on index-linked interest or market-based subaccounts respectively. On accumulating a substantial value, you can use the cash value to borrow or withdraw funds.
Yes. If you stop payments and there isn’t enough cash value to cover insurance charges, the policy can lapse. Regular monitoring is important to keep coverage active, especially if you’ve reduced premiums or if investment performance has been weak.
In most UL policies, the insurer keeps the cash value and pays only the death benefit to your beneficiaries. Some policies let you choose an option where both the death benefit and cash value are paid out, but this may come with higher premiums, and must be selected at policy issue.
Yes, you can borrow or withdraw funds through the cash value on a universal life policy. The amount depends on how much cash value your policy has built up. Insurers usually let you borrow a percentage of that value. Loans are generally tax-free if the policy stays in force, but interest accrues and unpaid balances can reduce the death benefit.
It can be, depending on your goals. A 401(k) should typically come first, but universal life may serve as a supplemental savings tool with tax-deferred growth and a guaranteed death benefit. Just remember the costs and complexity make it less efficient than dedicated retirement accounts.
While they are both permanent policies, whole life offers guaranteed premiums and cash value growth, while universal life offers flexibility. With UL, premiums and death benefits can be adjusted, and the cash value grows differently depending on the subtype. Whole life is more predictable; UL gives you more control.
Indexed UL credits cash value based in part on a market index, with caps on gains and floors to protect against losses, but your money isn’t invested directly in the stock market. Variable UL, on the other hand, puts money directly in market-linked sub-accounts like mutual funds, often with no caps or floors, thus, high growth potential but also high risk.
Some people use the cash value as a supplemental source of income in retirement, often through policy loans. But it shouldn’t replace traditional savings vehicles like a 401(k) or IRA. Using cash value reduces the death benefit and requires careful management to avoid tax issues.
Yes, you can access the cash value in a universal life policy. Withdrawals or loans may reduce the death benefit and could trigger taxes if they exceed what you’ve paid in. If you fully surrender the policy, your coverage ends and you may owe fees or taxes on gains along with a surrender charge.
Yes, universal life can play a role in estate planning. The death benefit can help cover estate taxes, provide liquidity to heirs, or fund a trust. Because UL is permanent coverage, it ensures a payout is available whenever you pass away as long as the policy stays in force.
Author
Chief Underwriter
Expert review
Chief Compliance & Privacy Officer
Jan 11, 2026
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