If you’re looking for life insurance that provides coverage for your entire life, accumulates cash value, and allows for flexibility in both payments and death benefits, a universal life policy might be a good option. However, it’s not the right choice for everyone. Consider the advantages and disadvantages of universal life insurance before making a decision.
What is Universal Life Insurance?
Universal life insurance is a type of permanent life insurance. This means it provides coverage for your entire life and builds cash value over time. These policies typically remain in effect until the insured reaches an advanced age, such as 95 or 120. This coverage offers flexibility that other permanent policies, such as whole life insurance, don’t offer. For example, you can control the amount you pay in premiums, which can be appealing to those with variable incomes.
How Does a Universal Life Insurance Policy Work?
Universal life policies function similarly to other permanent policies. In exchange for your premiums, you typically receive 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 policy types.
Universal Life Insurance Cash Value
When you make a premium payment, the insurance company deducts the cost of insurance and any administrative fees. The remaining amount 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 primary advantage 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 administrative charges, are added to your cash value. Alternatively, you can choose to pay less than the minimum premium. If you do this, make sure you have sufficient cash value to cover the cost of insurance and other expense charges; otherwise, your coverage may lapse.
Universal Life Insurance Death Benefit
You usually have the option to decrease your life insurance death benefit, which can be helpful if you don’t need as much coverage later. Some insurers may allow you to increase your coverage also, although this option is less 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 throughout the life of the policy. For example, if you purchase $100,000 of coverage and accumulate $60,000 in cash value, your beneficiaries will receive $100,000 upon your death.
- Increasing death benefit: The cash value balance is added to the death benefit. So, in the previous example, your beneficiaries would receive $160,000 — the death benefit plus the cash value. This option usually comes with higher premiums.
Universal Life Insurance: Pros and Cons
If you’re in the market for a permanent life insurance policy and if its premiums fit your budget, universal life insurance offers considerable flexibility and potential returns. However, it also has downsides. Weigh the pros and cons of a universal life policy to decide if it’s 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 convenient during financially challenging times. However, paying less could lead to a policy lapse, so it’s a good idea to consult with a fee-based life insurance advisor before making significant changes to your premium payments.
- Flexible Death Benefit: Your policy may include the option to increase the death benefit if needed. However, you will likely need to pass a life insurance medical exam to qualify for the increased 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 vary frequently.
Disadvantages of Universal Life
- Requires You to Monitor Your Policy: The policy may become underfunded if you don’t pay careful attention to your cash value, potentially leading to requirements for large payments to maintain your coverage.
- More Exposure to Risk: Universal life insurance can be a great product when interest rates rise. However, if rates drop, your cash value account might not grow as expected. Fortunately, universal life insurance policies typically include guaranteed minimum interest rates.
Universal Life Insurance vs. Whole Life Insurance
Similar to universal life, whole life policies are another form of permanent coverage. This means they can last your entire life. However, unlike universal life, whole life policies have fixed premiums and death benefits and offer guaranteed cash value growth. So, whole life may be a simpler option if you want a permanent policy that doesn’t require close monitoring. But if you want to adjust your coverage and premium payments over time, you may prefer universal life.
How Much Does Universal Life Insurance Cost?
Here are average annual premiums for a $500,000 universal life policy compared with a whole life policy. Note that this is not a direct comparison because the policies function differently. For instance, universal life policies do not guarantee cash value growth, but whole life policies do, which makes the latter a typically more expensive product.
Source: Covr Financial Technologies. Lowest three rates for each age averaged, as of February 25, 2025.
Source: Covr Financial Technologies. Lowest three rates for each age averaged, as of February 25, 2025.
Other Types of Universal Life Insurance
There are three other types of universal life policies you may want to consider:
- Guaranteed universal life insurance does not require the same hands-on approach as standard universal life and is often described as a compromise option between term and whole life. It typically 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, the cash value will be placed in a fixed account unless you specify other investments.
- Variable universal life insurance has a cash value portion invested in various subaccounts of your choice, though it does have the potential for higher returns and losses, and therefore comes with higher risk.
Universal Life Policy Riders
Your insurance company may offer several riders for a universal life policy. Life insurance riders are add-ons you can use to personalize your policy. They may add coverage features or guarantees, but they’re usually optional or come with an additional premium.
- No lapse guarantee: As long as you pay the annual amount required to maintain the guarantee — which may be higher than the billed minimum premium — your death benefit will remain in place, even if your cash value declines.
- Waiver of cost of insurance: This temporarily pauses premium payments if you become disabled. The waiver-of-premium rider keeps your policy in force, but does not add to the cash value.
- Accelerated death benefit: This lets you 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 be sure to check which illnesses are covered and how much your insurer will pay.
- Family riders: Child term riders and spouse riders allow you to add coverage for additional members of your family under your universal life policy.
- Accidental death: An accidental death benefit rider increases the policy payout if you die in, or as a result of, an accident.
- Guaranteed insurability: This lets you increase the death benefit of your policy at specific life stages or policy anniversaries without an exam or health questionnaire. With a guaranteed insurability rider, 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 can be complex; thus, to locate the right insurance provider, emphasize the following:
- Financial strength: You want a financially stable life insurance provider to feel confident your cash value is secure and your beneficiaries will receive a payout upon your death. In most cases, you can find financial strength ratings for life insurance companies from AM Best or S&P Global Ratings, though 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 you’re looking for — the aforementioned riders may not be available from every company. Universal life policies can be sold with different guaranteed level premiums and various fee structures.
- Expert advice: Consulting a fee-only life insurance consultant, and you can typically find one through an online search, is a good idea. These experts can help you better understand how the company’s products differ.
Frequently Asked Questions
What are the downsides of universal life insurance?
Universal policies usually don’t have fixed interest rates, so they are less predictable than whole life insurance policies. If you miss a payment on a universal life policy or fail to contribute enough to the cash value, you may end up making several large payments to keep the coverage.
Is universal life insurance worth it?
Universal life insurance can be a worthwhile investment if you want flexible premiums and permanent coverage. Keep in mind that universal life is usually 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 provided to employees as part of their workplace benefits. Coverage details vary between employers and insurers.
What are the downsides of universal life insurance?
Universal policies typically don’t have fixed interest rates, so they are less predictable than whole life insurance policies. 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 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.
