You’ve reached a point in your life where it’s time to think about life insurance, and you’re researching the best options to keep your family and other dependents protected. Along the way, you’ve probably encountered the term universal life insurance from friends or insurance agents. But what exactly is universal life insurance? And is it a good idea to buy some? 

Universal life insurance, like all types of life insurance policies, comes with both advantages and disadvantages. In this article, we’ll review the specifics of how universal life insurance functions, why it might or might not be a good idea for you, and how to go about obtaining it! 

One of the best ways to research life insurance plans is through Insurify. Insurify is a leading insurance comparison site that helps you compare individualized quotes from over ten life insurance carriers in just a few minutes!

Universal Life Insurance: The Basics

Universal life insurance is a form of permanent life insurance that allows for cash value accumulation. Unlike most other forms of life insurance, universal life insurance includes a savings account that can either increase or decrease in value; it’s a hybrid between traditional investment and a life insurance policy. Most of the time, we think of the stock market or mutual funds when we think about investment. But universal life insurance offers a unique, tax-deferred investment method.

Permanent life insurance policies are plans that do not expire after a set amount of time. Unlike other permanent life insurance policies, universal life insurance has an added cash value component and cheaper insurance premiums

Universal policies are one of the most flexible types of life insurance, as you can increase, decrease, or even stop the premium and the death benefit over time. This flexibility to adjust your payments as your life circumstances change or alter is one of this policy type’s main advantages. 

However, one disadvantage of this flexibility is that your minimum premium (also known as the cost of insurance) will increase over time as you age, as we’ll cover in more detail later on.

How Does Universal Life Insurance Work?

Universal policy premiums include two components: the cost of insurance amount and the savings component amount, also known as the cash value.

The cost of insurance (COI) is the minimum amount you must pay to keep your policy active. This amount varies based on your age, health, and insured risk amount. In universal life insurance policies, the cost of insurance usually increases as you age. This differs from whole life policies, in which the policyholder pays a fixed premium for their entire life. 

In a universal life policy, any amount of money you pay above the COI goes into the savings component, an investment account. The interest you earn grows and is tax-deferred, increasing the cash value of the policy.

Pros and Cons of Universal Life Insurance

As with all types of life insurance policies, universal life insurance has both financial strengths and weaknesses, and its benefits will vary from customer to customer. Because each policyholder has a unique life and financial situation, universal life insurance’s disadvantages might be prohibitive for some but less critical for others.

Pros

  1. Guaranteed death benefit: As with all life insurance policies, if you die while the policy is active, the insurance company will pay out a tax-free, no-strings-attached death benefit to your beneficiaries. This means that your heirs will not have to pay income tax on the money and can use their benefit amount for whatever they may need, whether that’s funeral costs, college tuition, or long-term care for a widowed spouse. 
    • One thing to note: if you’ve made the beneficiary of your policy an estate, rather than an individual, then the person or people inheriting that estate might have to pay estate taxes.
  2. Flexible premiums: Though there is a minimum amount you have to pay for your universal life insurance (the cost of insurance), you have the option to pay more in times of financial success. This additional money goes into the savings component and allows you to build cash value. Conversely, you can also pay less during times of hardship. 
    • Some universal life insurance policies will allow you to stop paying your premiums altogether––for a certain length of time. However, you should speak with your insurance agent about whether this applies to your specific policy before stopping your payments. That way, you’ll avoid dangerous policy lapses and potentially losing your lifetime coverage
  3. Savings component: By contributing excess money above and beyond your basic premium when you’re able, you can grow your savings component, which grows interest and provides collateral that you can borrow against with tax-free policy loans. Some people use their universal life insurance as an alternative to a 401k or other retirement accounts.
  4. Tax-deferred growth: The interest your savings accrue is income tax-free until you withdraw it. This means that the account can increase in value faster than if you had to pay taxes on the interest.

Cons

  1. Variable premiums: Unlike whole life insurance policies, which have fixed premium payments, universal life policies have variable premiums that increase as you age. Given that most people rely on a fixed source of retirement income, the increasing premiums can end up becoming a severe financial hardship and causing lapses in coverage when it’s needed most.
  2. Fees: Though the savings component is an attractive facet of universal life insurance policies, withdrawing money from that account can come with fees attached. If you try and withdraw your cash value early, you may be subject to surrender charges
    • The surrender value is the difference between your cash value and any possible surrender charges. Surrender charges are typically no longer in effect after 10 to 15 years for a universal life insurance policy.
  3. Interest rates: Because the life insurance company wants to demotivate you from taking out loans against your policy, interest rates can be particularly high. Most universal life insurance providers charge rates of five to nine percent, in addition to the flat fees you’ll need to pay to take out a loan in the first place.
  4. Savings component not included in death benefit: If you don’t withdraw all the money in your savings component before you pass away, it’s not included with the death benefit payout to your beneficiaries. The insurance company keeps any money in the savings portion of your policy.

Comparing the Different Types of Life Insurance

To truly determine whether universal life insurance is the right life insurance type for you, you’ll need to learn about the most common alternatives! Read on, and remember that you can find more information about specific life insurance policies and carriers and affordable insurance quotes at Insurify.

Term Life Insurance

Term life insurance is the cheapest and most straightforward type of insurance policy. When you purchase a term life insurance policy, you agree to pay a premium for a set term length––often 20 or 30 years. If you pass away during that period, the insurance company pays out a death benefit to your beneficiaries. Once the term length is up, the policy and its coverage end. If you want to continue your life insurance coverage, you will have to reapply for a new policy––and the premiums will likely be higher for an older applicant.

Because you do not contribute to an investment account with this type of policy, you don’t get any money back once the term ends. This is what makes it less expensive than other alternatives. If you are considering buying term life insurance, Insurify has more in-depth information at the ready to help you with your search.

Whole Life Insurance

A whole life insurance policy is a permanent policy like universal life insurance. It also has an investment component; you can accrue a policy’s cash value while paying your premium. Unlike universal life insurance, though, your premiums are fixed when you purchase a whole life policy: they won’t go up as you age. That said, the level premiums, fixed death benefits, and generous living benefits can make this type of policy quite expensive. Insurify has more information on the differences between whole and term life insurance policies if you’re choosing between the two.

Starting Your Universal Life Insurance Journey

Though purchasing a life insurance policy is no easy task, doing your research and taking the time to identify your long term needs and goals will ensure fewer struggles down the line.

Leading quote comparison site Insurify can help in your life insurance journey. Insurify’s free life insurance quotes comparison platform gives you quotes from many prominent life insurance providers in just a few clicks.

After you’ve taken the time to do some quote comparison research of your own—and unlocked some discounts in the process—you might want to consider talking to an independent financial advisor about your potential universal life insurance policy. Life insurance products are complicated long-term investments, so it makes sense to do your research and ask questions! 

In times of stress and confusion during this process, remember the purpose of your life insurance search: ensuring that your loved ones are protected and financially secure, no matter what the circumstance.

Universal Life Insurance: Quick Questions

What’s the difference between whole life insurance and universal life insurance? 

Whole life insurance and universal life insurance are both permanent policies, meant to last your entire life. Whole life insurance policies have fixed premiums that don’t change, while universal life insurance policies have flexible premiums that you can adjust. 

If I withdraw funds from my universal life insurance policy, will I have to pay a surrender fee? 

The answer depends on how many years you’ve had the policy. Usually, you can withdraw funds without a surrender fee on your universal life policy after 10 to 15 years––before then, you’ll have to pay the charge. 

What’s the best way for me to compare life insurance policies?

Compare life insurance options and carriers swiftly, safely, and easily with Insurify. Insurify is a top-ranked insurance comparison site reimagining how you buy insurance online and using cutting-edge artificial intelligence to make the process streamlined and hassle-free.

Browse, Compare, Discover with Insurify today. 

Updated April 14, 2021

Sabrina Perry is a writer with experience in data journalism and a passion for translating complex topics into insightful and engaging stories. She has a degree in neuroscience from University of California, Santa Barbara and can often be found reading books about behavioral economics, decision-making, and personal finance.