You are buying a policy because an agent called it flexible can backfire. If you underfunded, then the cash value shrinks, the monthly charges and the coverage will lapse decades later. By then you may be too old or too unhealthy to replace the plan.
The loss is not just the premiums you paid. It is the protection your family expected to receive.
Universal life insurance is a type of permanent life insurance that will be a benefit when the insured person dies. It will also let you adjust to your premiums and coverage within the limits.
Quick Answer
Universal life insurance is a permanent life insurance policy with the death benefit, cash value account and the flexible premiums. The insurance company deduct the monthly charges from the cash value and the remainder earns interest or index linked credits. If the cash flow you cannot cover those charges then the policy can lapse.
 Is it right for you? It may fit if you need lifelong coverage and can fund the policy consistently. It is usually a poor fit if you only need coverage for a set number of years, because term insurance is built for that purpose.
What Is Universal Life Insurance? Policy Basics
Universal life insurance is a permanent life insurance contract that will combine a death benefit with the cash value account and flexible premium payments. The FINRA investor guide to life insurance describes it as coverage for the life of the insured with flexible premium payments and flexible coverage.
That is a working universal life insurance definition. The policyholder owns the contract, the insurance company issues it and the beneficiary will receive the death benefit.
How Does Universal Life Insurance Work?
Each premium goes into the policy and the insurance company first deduct the cost of insurance and that administrative fee. What remains goes into the cash value account, where it earns the interest or credits based on the policy type.
The cost of the insurance is the charge of the death benefit itself and generally rises as the insured person ages. That is why the policy that looks at 45 can come under pressure at age 70.
The flexibility is real. You can often pay more than planned, pay less or skip the payment if the cash value can cover the charges. There are so many policies let you choose between the level death benefit and one that will add the cash value to the face amount.
Increasing the death benefit usually requires new underwriting, which is the insurer’s review of your health and risk. Lowering it generally does not.
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What Are the Types of Universal Life Insurance?
Universal life insurance comes in several forms, in each when charges how the cash value grows and who carries the risk. The table below summarizes the main version.
Types of universal life insurance compared
| Type | How cash value grows | Main risk to watch | May suit |
| Fixed (flexible) universal life | Declared interest rate, with a contractual minimum | Credited rate can fall over time | Buyers who want simpler, steady growth |
| Guaranteed universal life | Minimal cash value, coverage guaranteed to a stated age if premiums are paid | Little or no savings component | Buyers focused on lifelong coverage at a lower cost |
| Indexed universal life (IUL) | Credits linked to an index, subject to caps, participation rates, and often a floor | Caps and rates can change, and illustrations can look optimistic | Buyers who accept limits on upside in exchange for downside protection |
| Variable universal life (VUL) | You choose investment subaccounts, so value moves with the market | You can lose cash value in a downturn | Buyers with higher risk tolerance who understand securities |
| Group universal life | Offered through an employer, with features set by the plan | Coverage may end or change if you leave the job | Employees who want to add coverage on top of basic group life |
What is indexed universal life insurance?
An index universal life insurance policy credit interest based on how a market index performs, such as S&P 500.
What is variable universal life insurance?
Variable universal life insurance will let you direct the cash value into the investment of account. The variable life and variable universal life are considered as the securities and must be registered with SEC.
How Much Does Universal Life Insurance Cost? (Quotes, Rates, and Calculators)
The cost of universal life insurance depends on your age, your health, your smoking habits, the death benefit and the policy type. And also how much you choose to find. Because these factors will interact, universal life insurance rates differ widely from one person to the next.
This article does not publish sample rates. Any single number would not reflect your underwriting, and an inaccurate number is worse than none.
Permanent life insurance plans generally cost more as compared to the term life coverage for the same death benefit. You have to pay for the lifelong protection and for the cash value your components not only for the set number of years.
How to compare universal life insurance quotes properly
- Request the same death benefit and the same funding level from each insurer.
- Make sure to ask for an illustration that can show both guaranteed and non-guaranteed columns.
- Look at what happens if credited rates are lower than projected.
- You also have to make sure to ask about the surrender charges
- Confirm if the caps, participation rates, or interest rates can change.
Universal Life Insurance Pros and Cons
Advantages of universal life insurance
- Coverage is permanent when the policy is properly funded.
- You can adjust premiums and, in many cases, the death benefit as life changes.
- Generally the cash value grows tax deferred.
- You may be able to borrow against the cash value, which can help in a cash need.
- Indexed versions offer a way to participate in index gains with a floor on losses.
Disadvantages of universal life insurance
- Underfunding can cause the policy to lapse, sometimes years after you stopped paying attention.
- Charges are built into the policy and can be difficult to see without an illustration.
- Indexed policies limit your upside through caps and participation rates.
- Policy loans reduced death benefit if it is unpaid and can create a tax bill if the policy lapses with an outstanding loan.
- Surrender charges can make early cancellation expensive.
Universal vs Whole Life Insurance vs Term: Which Fits?
Term insurance covers a set period, whole life offers fixed terms for life, and universal life offers adjustable premiums for life. The table shows the practical differences.
| Feature | Term life | Whole life | Universal life |
| Coverage length | Set period, such as 10, 20, or 30 years | Lifetime | Lifetime, if properly funded |
| Premiums | Level during the term | Fixed | Flexible within limits |
| Cash value | None | Yes, with guaranteed growth | Yes, growth depends on the policy type |
| Flexibility | Low | Low | High |
| Cost for the same death benefit | Generally lowest | Generally higher | Varies by type and funding |
| Main risk | Coverage ends when the term ends | Higher cost for the coverage | Lapse if the policy is underfunded |
Is Universal Life Insurance Right for You?Â
Before you buy, check these five things
- Confirm the need. Decide whether you need coverage for a set period or for life.
- Read the guaranteed column. Make sure the policy works under the worst contractual case.
- Ask who can change the terms. Caps, rates, and charges may not be fixed.
- Check the insurer. Review its financial strength rating from AM Best, which rates insurers’ ability to meet obligations.
- Check complaints. Your state department of insurance and the NAIC consumer resources can show how an insurer treats policyholders.
A Simple Next Step
If you want to see how these policies compare for your situation, Mlife insurance can walk you through quotes and illustrations at your own pace. You can ask questions, request the guaranteed scenario, and take time to decide.Â
Secure Your Family's Future with Confidence
Don’t leave your loved ones' financial security to chance. Use our expert tools and free resources to find the perfect coverage today.
FAQS
Universal life insurance is complex as compared to term life plans or whole life insurance. Also the flexible premiums can create a risk of policy lapse.
No. Dave Ramsey generally advises against universal life insurance and recommends term life insurance instead. His view is that term coverage is simpler and usually provides more coverage for the premium.
When the insured person dies while the policy is active, the beneficiaries generally receive the death benefit according to the policy terms. Any outstanding policy loans and interest may reduce the amount paid.
It depends totally on your needs and also your financial situation. Universal life can suit someone who wants permanent life coverage and flexible premiums, but it can be more complicated and also require careful monitoring. Term life may be simpler if you mainly need affordable protection for a specific period.
Joyce Espinoza, Expert Life Insurance Agent
Joyce Espinoza is a trusted life insurance agent at mLifeInsurance.com. She’s been in the insurance industry for over ten years, helping people, especially those with special health conditions to find the right coverage. At MLife Insurance, Joyce writes easy-to-understand articles that help readers make smart choices about life insurance. Previously, she worked directly with clients at Mlife Insurance, advising nearly 3,000 of them on life insurance options.
