What Is Universal Life Insurance?

While there are various types of life insurance policies available, one that often stands out for its flexibility and potential for long-term financial growth is Universal Life Insurance.

Universal Life Insurance is not as widely understood as its more traditional counterpart, Term Life Insurance, but it has gained popularity in recent years due to its unique features and benefits. 

In this article, we’ll take a deep dive into the world of Universal Life Insurance, exploring what it is, how it works, and why it might be a valuable addition to your financial planning portfolio. 


  • Universal life insurance is a type of permanent life insurance that offers policyholders the flexibility to adjust their coverage and premiums.
  • It has cash value growth capabilities, adjustable premiums, customizable death benefits choices and potential for higher returns than whole life insurance.
  • Factors to consider when choosing universal life include lifelong coverage, flexible premiums & death benefits as well as potential changes in circumstances over time.
  • In many cases, Indexed Universal Life insurance offers the best way to both grow and protect your wealth in retirement.

Watch this short video to learn more about how I can help you find the best Universal Life options from a wide range of insurance companies.

Defining Universal Life Insurance

Universal life insurance is a type of permanent life insurance that offers flexible premium payments, adjustable death benefits, and a cash value component with the potential to accrue over time.

Unlike traditional term or whole life insurance policies, universal life insurance provides policyholders with the option to adjust their coverage as their needs change throughout life.

While universal life insurance policies tend to have higher premiums than other types of life insurance, such as term life insurance, they also provide more flexibility in terms of premium payments and death benefits.

This adaptability makes universal life insurance an attractive option for individuals seeking a more personalized approach to their life insurance coverage.

How Universal Life Insurance Policies Work

Universal life insurance policies, also known as UL policies, offer lifelong coverage, coupled with exclusive features including cash value growth, malleable premiums, and adjustable death benefits.

This unique blend of characteristics makes universal life insurance a popular choice for those seeking a more customized approach to their life insurance needs.

We will now examine the key components of universal life insurance policies.

Cash Value in Universal Life Insurance

The cash value of a universal life insurance policy offers the following benefits:

  • It increases based on interest rates, with a guaranteed minimum rate.
  • It can be accessed through withdrawals or loans.
  • It allows policyholders to potentially build a nest egg over time.
  • The money in the cash value account accrues interest at the rate set by the insurer.

However, it is important to note that the cash value component of a universal life insurance policy typically yields a comparatively low return on investment compared to other investment options like good growth stock mutual funds through tax-advantaged retirement accounts.

Accessing the policy’s cash value in a universal life insurance policy can have both benefits and drawbacks. 

Here are some key points to consider.

  • If you borrow against the cash value, the loan amount would not be taxable as long as it is fully repaid while the policy is still in effect.
  • However, accessing the cash value will result in a decrease of the death benefit.
  • If the policy is not adequately funded, it could lead to a substantial financial burden in order to sustain the coverage initially agreed upon.

Flexible Premiums in Universal Life Insurance

One of the most appealing aspects of universal life insurance is the flexibility it offers in terms of premium payments. Flexible premiums enable policyholders to modify their payments, provided that they maintain sufficient cash value to avert policy lapse.

This means that as your financial situation changes over time, you can adjust your premium payments accordingly, giving you more control over your life insurance policy.

However, it’s important to be aware of the potential risks associated with flexible premium payments. Paying the maximum premium possible in the early years of a universal life insurance policy in order to build a larger cash value can be a risky move, as the cost of insurance increases with age.

Regular monitoring and adjustment of your premium payments as needed is vital to keep your policy in good standing.

Death Benefits in Universal Life Insurance

When it comes to death benefits, universal life insurance offers two options: level (constant) or increasing (adding cash value).

A level death benefit provides a guaranteed, constant payout to your beneficiaries upon your death. On the other hand, an increasing death benefit adds the cash value balance to the original death benefit, resulting in a potentially larger payout for your beneficiaries.

Your policy may also include options to:

  • Increase or decrease the death benefit, depending on your needs
  • If you wish to increase the death benefit, a life insurance medical exam may be necessary to qualify
  • If you wish to decrease the death benefit, it is usually possible to do so after the policy has been in effect for a few years

Such flexibility in death benefits enables the customization of your universal life insurance policy to your specific needs.

Pros and Cons of Universal Life Insurance

Like any financial product, universal life insurance has its advantages and disadvantages. On the plus side, universal life insurance offers adjustable premiums, potential cash value appreciation, and lifelong coverage. 

This flexibility allows policyholders to adapt their coverage to their evolving needs over time.

However, universal life insurance also carries heightened risk exposure and necessitates ongoing surveillance. The cash value component may not increase as anticipated, leading to a reduced death benefit than expected.

Additionally, if the policyholder fails to make payments or maintain sufficient cash value, the policy may expire, and the death benefit will not be disbursed.

When considering whether universal life insurance is the right choice for your financial situation, it’s vital to speak to a retirement planner first. Watch this video to see how we can help you assess which option is best for you in retirement.

Comparing Universal Life Insurance with Whole Life Insurance

When drawing a comparison between universal life insurance and whole life insurance, one should take into account the differences in:

  • Flexibility
  • Premiums
  • Cash value growth
  • Investment options

Whole life insurance provides a guaranteed fixed interest rate, with a fixed premium amount and guaranteed death benefit amount. This makes whole life insurance a more predictable, albeit less flexible, option compared to universal life insurance.

Universal life insurance does not guarantee returns on cash value. The interest rate will depend on the investment chosen by the insurer and can fluctuate.

This increased flexibility and potential for higher returns can make universal life insurance an attractive option for some individuals, but it’s important to carefully consider your own financial goals and risk tolerance before making a decision.

The Cost of Universal Life Insurance

The cost of universal life insurance is contingent upon factors such as:

  • Age
  • Gender
  • Health
  • Coverage amount

Universal life insurance can be more expensive than whole life insurance owing to its increased flexibility and potential for higher returns.

However, these higher universal life insurance costs can be offset by the potential for cash value growth and the ability to adjust your premiums and death benefits as needed.

Keep in mind that the cost of universal life insurance is not fixed, it can change over time as your financial situation evolves.

Regular monitoring of your policy and adjustments to your premium payments can help ensure that your policy remains in good standing and provides the coverage you need.

Types of Universal Life Insurance Policies

There are several types of universal life insurance policies available, including guaranteed, indexed, and variable universal life insurance. 

Guaranteed universal life insurance provides a guaranteed death benefit and consistent premiums throughout the duration of the policy.

Indexed universal life insurance offers flexibility in terms of adjusting death benefits and premiums, while also involving higher investment risks as the cash value is based on the performance of stock indexes such as the S&P 500 and Nasdaq composite.

Variable universal life insurance grants the policyholder the ability to select the sub-accounts for the policy’s cash value.

This type of policy can be advantageous for individuals seeking more control over their investments, but may not be suitable for those who prefer a passive investment strategy or are risk averse.

Understanding the unique features and benefits of each type of universal life insurance policy can help you determine which option is best suited for your financial needs and goals.

Policy Riders for Universal Life Insurance

Policy riders are additional features that can be added to your universal life insurance policy to customize coverage and provide additional benefits or assurances.

Examples of policy riders include the no lapse guarantee rider, which ensures that the death benefit will persist provided the annual amount mandated to uphold the guarantee is remitted, even if the cash value decreases.

Other policy riders available in universal life insurance include:

  • The accelerated death benefit rider, which allows the policyholder to access some or all of the death benefit while still alive if diagnosed with a terminal, critical, or chronic illness
  • The waiver of the cost of insurance rider, which pauses premium payments if the policyholder becomes disabled
  • The guaranteed insurability rider, which allows the policyholder to increase the death benefit of their policy at specific life stages or policy anniversaries without an exam or health questionnaire.

By understanding the various policy riders available, you can better tailor your universal life insurance policy to meet your unique needs and circumstances.

Choosing the Right Universal Life Insurance Company

Factors such as financial strength, the range of options available, and expert advice should be taken into account when selecting a universal life insurance company.

See also: How to find the best annuity companies

To effectively evaluate the financial strength and ratings of a universal life insurance company, consider ratings from independent agencies such as A.M. Best, Standard & Poor’s, and Moody’s, which provide an indication of the company’s financial stability and capacity to pay out claims.

Along with financial strength, the reputation and customer reviews of a universal life insurance company should also be evaluated, seeking reviews from customers who have obtained policies from the company.

This will provide an indication of the quality of customer service and the level of satisfaction with the product.

By carefully considering these factors, you can make an informed decision about which universal life insurance company is best suited to your needs and financial goals.

Watch this short video to learn how you can easily compare the best universal life insurance company for your unique situation.

Universal Life Insurance vs. Term Life Insurance

Differences in coverage duration, premiums, cash value, and investment options should be considered when comparing universal life insurance to term life insurance.

Term life insurance provides coverage for a specified term, typically between 15 and 20 years, and offers lower premiums than universal life insurance.

Term life insurance is often recommended for individuals who need coverage for a specific period, such as during the years when their children are young or while paying off a mortgage.

Universal life insurance, a type of permanent life insurance policy, offers the following benefits, making universal life insurance work for many individuals:

  • Lifelong coverage
  • Adjustable premiums
  • Cash value accumulation
  • Ability to modify death benefits and premiums over time
  • Tax-free retirement income in the form of loans

This flexibility makes it an attractive option for those who desire a more personalized approach to their life insurance coverage.

Ultimately, the decision between universal life insurance and term life insurance depends on your specific financial situation, goals, and risk tolerance.

Factors to Consider When Choosing Universal Life Insurance

Several factors must be considered as you balance the advantages and disadvantages of universal life insurance. Some of the advantages include:

  • Flexibility
  • Potential for cash value growth
  • Lifelong coverage
  • Ability to adjust premiums and death benefits
  • Tax-free retirement income in the form of loans

However, it’s important to recognize that these benefits may come at a higher cost compared to term life insurance, which may be sufficient for most families.

Furthermore, it’s important to take into account potential changes in your circumstances over time. For example, if your income increases, you may be able to afford higher premium payments and may wish to adjust your death benefit accordingly.

Conversely, if you experience a decrease in income, you may need to decrease your premium payments to maintain your coverage.

By carefully considering these factors, you can make a more informed decision about whether universal life insurance is the right choice for your financial needs.


Universal life insurance offers a unique blend of flexibility, lifelong coverage, and the potential for cash value growth, making it an attractive option for individuals seeking a more personalized approach to their life insurance needs.

However, it’s important to carefully consider the potential risks, costs, and benefits associated with this type of coverage before making a decision.

By understanding the ins and outs of universal life insurance, you can make an informed choice that best aligns with your financial goals and provides peace of mind for you and your loved ones.

If you’re looking for expert guidance on finding the best options for your retirement, watch this short video to learn more about working with me.

As a trusted retirement planner with years of experience helping retirees plan their futures, I can provide personalized advice tailored to your unique goals and circumstances.

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