What Is Universal Life Insurance?

Rebecca Parson
Rebecca Parson

Rebecca Parson

Author

Rebecca Parson is a financial and tech writer with 10 years of experience writing about topics such as life insurance, commodities investing, and the SaaS industry. She has a master’s degree from Johns Hopkins University and a bachelor’s degree from the University of Mary Washington. Her writing has appeared at money.com, sacbee.com, cart.com, herodevs.com, blanchardgold.com, and more.

Brian OConnel
Brian OConnel

Brian O'Connel

Contributor

Brian O’Connell has been a contributing writer for U.S News & World Report since 2016. A former Wall Street bond trader and the author of two best-selling books; “The 401k Millionaire” and “CNBC’s Creating Wealth”, he has 20 years experience covering business news and trends, particularly in the business and financial sectors. He believes education is the best gift a financial consumer can receive – and brings that philosophy to every story he writes. His byline has appeared in dozens of top-tier national business publications, including CBS News, Bloomberg, Time, MSN Money, The Wall Street Journal, CNBC, TheStreet.com, Yahoo Finance, CBS Marketwatch, and many more.

By Rebecca Parson, Brian O'Connel
Author, Contributor, Life Insurance

Key Takeaways

  • Universal life (UL) insurance is a type of permanent life insurance with a savings (cash value) component.
  • The insurer sets the interest rate that the cash value earns.
  • The cash value grows tax-deferred over time.
  • Unlike term life insurance, UL life insurance does not expire after a certain period.

If you’re looking for adjustable premiums and a savings opportunity, a universal life insurance policy may be for you. It combines lifetime coverage with flexibility.

What Is Universal Life (UL) Insurance?

Universal life insurance is a kind of permanent life insurance that includes a cash value component and lasts your entire life if you keep up with the premiums. It’s different from whole life insurance because it lets you adjust your premiums up or down within certain boundaries, which might make it more affordable than whole life options. But if the investments linked to the policy don’t do well or you underpay for too long, the death benefit might decrease or you could even lose the policy altogether.

How Universal Life Insurance Works

UL insurance is more flexible than whole life insurance because it lets you adjust your premiums and death benefits to suit your needs. The premiums for UL insurance include two main parts: the cost of insurance (COI) and a savings element called the “cash value.”

The COI is essential for keeping the policy active and covers mortality charges, policy administration, and other costs associated with maintaining the policy. A mortality charge is a monthly fee that covers losses the insurer might incur if the policyholder dies unexpectedly. The COI varies depending on the policyholder’s age, health, and the amount of coverage.

Any premium payments that exceed the COI contribute to the policy’s cash value, which can grow over time. As the policyholder ages, the COI will naturally increase, but the accumulated cash value can offset these rising costs if it’s large enough.

How Much Does Universal Life Insurance Cost?

Universal life insurance is generally less expensive and more adaptable than whole life insurance. Your exact premiums will vary greatly depending on your age and health and only an insurer’s actuaries can accurately calculate it. 

However, as an example, a 40-year-old female nonsmoker in the U.S. might pay roughly $600 monthly for a $1 million universal life policy, while a male nonsmoker of the same age would typically pay about $700 per month. As a rule of thumb, life insurance is more expensive for men.

Advantages and Disadvantages of Universal Life Insurance

ProsCons
Flexible premiums and death benefitNo guaranteed returns
Cash value can growSome withdrawals are taxable
You can borrow against itCash value does not go to beneficiaries

Pros Explained

Flexible Premiums and Death Benefit

UL life insurance has flexible premiums within limits. You can make monthly payments above the COI, and the extra amount will go to the cash value and accrue interest. Or, if the cash value is high enough, you can lower or skip monthly payments without your policy lapsing if you ever need to.

You may also be able to increase your death benefit, although this may depend on a medical exam. Alternatively, you can decrease your death benefit to lower your premiums.

Cash Value Can Grow

A UL policy earns interest, usually in line with the market. Some insurers also have a minimum interest rate that your earnings will not go beneath.

Borrowing Against Your UL Policy’s Cash Value

A UL policy can build up cash value, which earns interest based on current market rates or the policy’s minimum interest rate. You can borrow against or withdraw from the cash value. You can then repay on your own terms or let the loan interest add to the loan. Your death benefit will decrease by the amount of the loan.

Cons Explained

No guaranteed returns

With UL insurance, there’s the risk that your cash value won’t grow as much as you’d planned for. While there’s a minimum rate of return, it can be quite low — 1% or 2%, for example.

Some withdrawals are taxable

While the cash value grows tax-deferred and the death benefit is income-tax-free for the beneficiaries, you may have to pay taxes on withdrawals.

Cash value does not go to beneficiaries

When a UL policyholder dies, the insurance company keeps the cash value and pays out only the death benefit to the beneficiaries.

Universal Life Policy Riders

Your insurer might offer a number of riders, which are add-ons to insurance policies. You pay an additional amount to add them to your policy. 

Some possible UL insurance riders include:

  • COI Waiver: If you have this rider, the insurer will pause your premiums if you become disabled. Your policy will still be in effect, but you won’t be adding any funds to the cash value.
  • No Lapse Guarantee: With this rider, your death benefit will always stay in place, even if your cash value decreases, as long as you keep paying the required annual amount to maintain this rider.
  • Family Riders: You can add this rider to get coverage for family members.
  • Accidental Death: This increases your policy’s payout in the event of your accidental death.
  • Accelerated Death Benefit: This rider lets you access some of your death benefit — usually up to 50% — before you die, if you contract a chronic, critical, or terminal illness.

Universal Life Insurance vs. Term Life Insurance vs. Whole Life Insurance

Universal LifeTerm LifeWhole Life 
Permanent coverage (no end date)Coverage has a defined end datePermanent coverage (no end date)
Builds tax-deferred cash valueNo cash valueBuilds tax-deferred cash value
You can borrow against the cash valueNo cash value for you to borrow againstYou can borrow against the cash value
Death benefitNo death benefit after the policy expiresDeath benefit
Flexible premiums — usually costing somewhere between term and whole life insuranceCheapest premiumsFixed premiums — usually the most expensive compared to universal and term

What Are Some Alternative Terms for Universal Life Policies?

Other names for UL insurance policies are “adjustable life insurance,” “flexible premium adjustable life insurance,” and “flexible death benefit life insurance.” These alternative terms highlight the policy’s primary feature, which is that you can adjust the death benefit and premiums as you need to. 

These policies’ underlying structure and function are the same as a UL insurance policy, even when called different names.

Can I Sell My Universal Life Insurance Policy?

Yes, you can sell your universal life insurance policy through a process known as a life settlement. A life settlement involves selling your policy to a third-party investor for a one-time cash payment. The investor then pays all future benefits and receives the death benefit when you die. 

Selling your UL insurance policy can be helpful if you don’t need it anymore or need the money. But there are potential tax implications and other things to consider, so we recommend you consult with a financial advisor first. Reach out to us at Beca Life to learn more.

How Much Will My Universal Policy Sell For? 

The amount your UL policy will sell for can vary by hundreds of thousands of dollars depending on your age, health, how high your policy’s death benefit is, the amount of premiums left to pay, and other factors. Sale prices range from 2% to 75% of the face value or death benefit.

Based on our experience, a life settlement offer will be higher than the policy’s cash surrender value but less than its death benefit. 

FAQs About Universal Life Insurance

What Is the Biggest Disadvantage of Universal Life Insurance?

A big disadvantage of universal life insurance is that your cash value can dip so much that the policy becomes underfunded. If that happens, you’ll have to make large payments to keep the policy in effect.

Which Is Better: Whole Life or Universal Life?

Whole life has fixed premiums, while universal life premiums may increase as you age. Both whole and universal life are permanent and build cash value.

Can a Universal Life Insurance Policy Collect Dividends?

No, a universal life insurance policy cannot collect dividends. A whole life policy can.

Should I Get Universal Life Insurance?

If you want lifelong coverage, investment potential, and tax-deferred savings, UL insurance may be for you. This is especially true if you’ve already maxed out your contributions to tax-advantaged retirement accounts.

Can I Cash Out My Universal Life Insurance Policy?

Yes, you can sell your universal life insurance policy, or you cancel the policy and liquidate the cash value by paying a surrender fee. Selling gets policyholders an average of five times as much as surrendering, according to the Life Insurance Settlement Association.

In Conclusion

Universal life (UL) insurance is permanent life insurance that builds tax-deferred cash value, has flexible premiums, a flexible death benefit, and options to borrow or withdraw against it. That said, your beneficiaries won’t get the cash value when you die — only the death benefit.

UL insurance usually costs more than term life insurance but less than whole life insurance.

If you already have a UL policy and want to sell it, reach out to us to see if your policy qualifies.

Sell your life insurance policy for cash.

See if you qualify now.

We’re here to help. Speak with a Policy Specialist today at +1 848-456-8333