Key Takeaways
- Universal life insurance is a permanent life insurance with cash value, flexible premiums and a flexible death benefit.
- Traditional universal, guaranteed universal, indexed universal and variable universal are all types of universal life insurance.
- Before you buy a policy, consider the best universal life insurance companies and work with an experienced financial advisor to ensure you have the information you need to make a confident purchase.
If you’re looking into permanent life insurance options, you’ve likely encountered universal life (UL) insurance. And if you’re interested in options and flexibility, it’s worth another look.
Like many permanent life insurance types, UL can be complex. Empowering yourself with knowledge about how universal life works will help you determine if it’s the right type of life insurance for your financial goals.
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What Is Universal Life Insurance?
Universal life insurance is a type of permanent life insurance. Like other types of permanent life, it includes a cash value component. It differs most in how cash value grows and the flexibility to adjust your premium and death benefit.
There are four main types of universal life insurance:
- Traditional universal life
- Guaranteed universal life
- Indexed universal life
- Variable universal life
Though we will cover some details of all universal life types, traditional universal life is the primary focus of this article.
How Does Universal Life Insurance Work?
Universal life insurance is also called adjustable life insurance. Here are some key components of how a guaranteed UL policy works:
- Lasts a lifetime. UL is a permanent life insurance intended to last a lifetime.
- Cash value. It has a cash value component you can access while still alive.
- Cash value growth. UL cash value grows based on rates set by the insurance company, which are usually determined by market rates and the company’s investment performance.
- Flexible death benefit. You can adjust a UL death benefit up or down within the policy parameters specified by the insurer.
- Flexible premiums. You can adjust your premium up or down within the policy parameters specified by the insurer.
- Growth limits. UL policies include participation rates, caps and floors on cash value.
Types of Universal Life Insurance
| Traditional universal life | Guaranteed universal life | Indexed universal life | Variable universal life | |
|---|---|---|---|---|
Cash value | Gains and losses are tied to a rate set by the insurer | Gains and losses are tied to a fixed rate | Gains and losses are tied to an index, such as the S&P 500 | Gains and losses are tied to investment sub-accounts that typically contain stocks and bonds |
Ability to adjust premiums | Yes | Some, but limited | Yes | Yes |
Ability to adjust death benefit | Yes | Reductions only | Yes | Yes |
Risk level | Low to moderate | Very low | Moderate to high | Very high |
Caveats | Changing premiums (lower) can lead to an underfunded policy and cause a lapse | Could lapse if you miss even one payment | Participation rates and caps can limit the cash value growth in an upside market | Plan to actively manage your sub-account investments; you could lose cash value if your investments drop |
Universal Life Insurance Pros and Cons
| Pros of Universal Life | Cons of Universal Life |
|---|---|
Flexible. You can adjust the premiums and death benefit within specified parameters. | Lower cash value return. Compared to IUL and VUL, returns are often lower. |
Lifelong protection. Lasts a lifetime, usually up to 95 or 121, depending on the insurer. | Complex. UL is complex and can be difficult to understand without the help of an experienced advisor. |
Tax advantages. Death benefit is not subject to income tax, and cash value grows tax-deferred. You could face taxes if you take out cash value greater than what you’ve paid in, or take out a loan you don’t pay back. |
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What Does a Universal Life Insurance Policy Cost?
The average cost of universal life insurance is $90 a month for a $250,000 policy for a 30-year-old female and $102 a month for a 30-year-old male, according to Forbes Advisor’s analysis of the best universal life insurance companies.
Your premium will depend on multiple factors specific to you, like age, coverage amount, medical condition, family medical history, criminal and driving record, risky hobbies and occupation.
How To Buy Universal Life Insurance
Identify the Best UL Companies
To help narrow down your options to the top companies, here are the best universal life insurance companies, according to Forbes Advisor’s analysis:
To determine the top companies, we looked at over 6,600 universal life policies and assessed things like cash value growth, investment performance, the accuracy of the company’s policy illustrations and rates.
Get life quotes from multiple companies and discuss them with your advisor to determine the best policy and insurer for your needs.
Work With an Experienced Advisor
“Working with an experienced financial advisor or insurance agent is a wise choice, especially when it comes to buying a more complex life insurance product like universal life,” says Jason Metz, Forbes Advisor editor. “Doing so helps to ensure you’re informed and understand the policy you’re buying,” he says.
Ask About Policy Costs
Don’t be afraid to discuss policy costs, not just the premium. Ask for a breakdown of all policy costs. If your UL policy is high-fee, that will negatively impact the amount of your premium payment that can go toward cash value. That means there will be less cash in the cash value account to earn interest and less to utilize.
Carefully Review Policy Illustrations
“Policy illustrations contain guaranteed and non-guaranteed projections. And yes, it can be tempting to look only at the rosy non-guaranteed projections. But don’t ignore the guaranteed projections as they often paint a more realistic picture of the future,” advises Michelle Megna, Forbes Advisor editor.
Alternatives to a Universal Life Insurance Policy
- Guaranteed universal life insurance. If cash value growth isn’t a top priority, guaranteed universal life (GUL) is a universal life option with a fixed death benefit and premium. It is the least expensive of universal life options, but has little cash value in return. You select the policy maturity age, and can expect the premium to increase as the age you select increases.
- Indexed universal life insurance. If you’re interested in UL’s flexibility, indexed universal life insurance (IUL) is another option. You can adjust the death benefit and premiums within certain limits. Your cash value will be tied to a stock market index, like the S&P 500 or a combination of indexes. You also have a fixed-interest option. IUL policies have participation rates, caps and floors. They are also known for high policy fees, which can eat away at cash value.
- Variable universal life insurance. If flexibility is paramount, but you also want the ability to manage your own investments, variable universal life (VUL) is a worthy consideration. Your premium and death benefit can be adjusted, within certain limits, and your cash value is tied to sub-accounts you choose and manage. There are no participation rates, caps or floors and ideal for people with a high risk tolerance.
Ethos
Instant
$2 million
10, 15, 20, 30 years
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Universal Life Insurance Frequently Asked Questions (FAQs)
Is universal life or whole life the best type of policy?
Universal life insurance is less expensive than whole life insurance and comes with a lot more flexibility. You can adjust premium payments and the death benefit of a UL policy—you can’t do that with whole life. Whole life is significantly more expensive due to its low risk and built-in guarantees. But which wins in the universal life vs whole life debate depends on your financial needs and your risk tolerance.
If I die, what happens to the cash value in my universal life policy?
The cash value of any permanent life insurance is intended for your use while living. When you die, the cash value left in your policy will return to the life insurance company. The death benefit will be paid to your beneficiaries.
What’s the difference between term vs. universal life insurance?
The only similarity between term and universal life insurance is that they include a death benefit. They differ in nearly every other way. Term life is for a specific period, with fixed premiums and a guaranteed death benefit if you die within the term. Term does not have a cash value component but offers cheaper premiums than other types of life insurance. Universal life has flexible premiums, a flexible death benefit and the opportunity for cash value accumulation.
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