What is universal life insurance?

You have many options for permanent life insurance, and finding the right policy depends on your investment strategy and the amount of coverage you need. Universal life insurance (UL) will give you more flexibility when it comes to premiums, death benefits, and investment indexes, but it’s not for everyone.

Keep reading to learn how UL works and whether it’s a good fit for your portfolio. We compare different types of universal life insurance policies and quotes from the best companies to help you find the right coverage.

What is universal life insurance and how does it work?

Since it’s a permanent policy, universal life insurance coverage lasts your entire life. This means your loved ones are guaranteed to receive the policy death benefits upon your passing as long as you continue to make your monthly life insurance payments.

Like other permanent life insurance, UL comes with two parts — the cost of insurance (your monthly rates) and the cash value. Your policy’s cash value acts like a life insurance savings account, where a portion of your monthly rates and anything extra you decide to pay is invested. You can later borrow against it, use it to make life insurance payments, or add it to the death benefits you leave behind. 

Unlike traditional permanent policies, you have much more flexibility with universal life. Both your premiums and your death benefits can be adjusted based on how much you want to pay per month. 

Universal Life Insurance Premiums

Universal life is a type of flexible premium life insurance, meaning policyholders can adjust how much they pay each month in life insurance rates.

For example, any extra money you pay over the amount owed each month is added to the policy’s cash value. You can later use the returns from your cash value to pay future universal life insurance premiums or increase the overall death benefit left for your loved ones.

Similarly, if you pay less each month, your insurance company will cover the difference with the policy’s cash value. If you aren’t careful, you risk depleting your death benefits and voiding the policy.  

Universal Life Insurance Death Benefits

If you buy universal life insurance, you’ll have the option of choosing your death benefits:

• Level death benefit. The benefit amount remains the same for the life of the policy.
• Increasing death benefit. Your life insurance company pays out the death benefit plus the cash value.

Increasing death benefit policies come with higher monthly rates, but your beneficiaries receive the full value of the policy. The downside to choosing level benefits is that your beneficiaries will only receive the level benefit amount, even if your investments increase the policy’s cash value. 

Like your premiums, you can also decrease your death benefits as you get older if you no longer need as much coverage. This can lower your rates, but adjustable death benefit options vary by company. Shop around for multiple life insurance quotes to find the type of coverage you need.

The Difference Between Universal and Whole Life Insurance

The biggest difference between universal life insurance and whole life insurance is the flexibility — you can’t adjust premiums or death benefits on whole life. You also have the potential to earn more with UL, as different types of universal policies offer varied investment strategies.

However, whole life insurance guarantees a death benefit. When you buy universal life insurance, you run the risk of depleting death benefits when you borrow against the cash value or use it to cover insurance rates. Find whole life insurance companies here.

Read more: Modified Whole Life Insurance Explained

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Types of Universal Life Insurance

If you’re interested in UL, it’s important to pick out a policy based on your investment strategy. How you want to use your returns will influence the type of universal life insurance you buy. 

For example, you may not want to invest as aggressively if you only need extra funds to cover future life insurance payments. On the other hand, high-risk investments can pay off if you intend to withdraw the cash value later in life.

Consider your options and speak with a financial advisor, as some policies afford more flexibility than others:

• Variable universal life insurance (VUL). You can invest the cash value in any index, equity, or sub-account you wish, but earning potential depends on market performance.
• Indexed universal life insurance (IUL). IUL presents less risk than variable life because the agent chooses where to invest, but you’re limited to the index the insurance company chooses.
• Equity indexed universal life insurance. You can invest the policy’s cash value in equities, but these are the most unpredictable investment markets and often require the guidance of a financial advisor. (For more information, read our “How to Find a Life Insurance Advisor“).

The main difference between the different types of universal life insurance is how you get to invest the cash value. If you want more freedom of choice, buy variable or equity indexed life insurance. 

Indexed universal life insurance is a good option if you want to supplement your existing 401(k) or IRA investments, but it’s not a strong replacement for either. Learn more about a 401(k) vs. indexed universal life insurance to determine if it’s the right investment strategy for you.

Advantages and Disadvantages of Universal Life Insurance

Now that you know the types of universal policies available and how UL premiums and death benefits work, is it the right life insurance for you? 

The benefits of universal life insurance will outweigh the risks if you have the right financial plan, but you could end up without any death benefits if you misjudge the market. 

Consider the following universal life insurance pros and cons before you buy:

UL Pros:

• Policies accumulate cash value.
• The cash value has the potential to earn more than whole life based on the type of investment.
• You can borrow against the policy’s cash value.
• You can use the cash value to make future life insurance payments without risking a policy lapse.

UL Cons:

• Without increasing death benefits, any returns you earn go back to the insurance company after your death.
• You must pay a surrender fee to withdraw funds from the policy’s cash value.
• You must pay back any loans from the policy with interest.
• Universal life insurance rates are more expensive than term or whole life insurance rates.

What is the biggest disadvantage of universal life insurance? The risk. Your returns on the cash value depend on market performance, and growth is not guaranteed. You also have to pay much higher monthly rates for this kind of flexibility and coverage.

How much does universal life insurance cost?

Universal life insurance rates are more expensive than term and whole life insurance due to the coverage flexibility and gain potential. The type of policy you choose will also impact your rates, as equity-based life insurance is often much more expensive. 

However, you can still get competitive quotes when you better understand how life insurance rating classes work.

All insurance companies categorize policyholders based on risk, and life insurance companies consider your age, gender, and medical history to determine how healthy or high-risk you are. In general, young people with no health risks get the cheapest life insurance rates.

Men pay more for life insurance, but all genders will see their universal life insurance costs steadily increase as they get older. For example, rates for people in their 50s are triple what 20 and 30 year olds pay. Learn more about life insurance rates by age and gender to find out how these factors affect how much you pay and lower your overall costs.

Realize that your rates will be higher than average based on the gain potential of the cash value, but you can still get the lowest quotes possible when you sign up for a universal policy in your 30s or 40s. Healthy lifestyle changes will also lower your rates, so consider quitting smoking and taking steps to lower your blood pressure and cholesterol before you get quotes. 

Which companies offer the best universal life insurance rates?

Most of the major life insurance companies offer universal life policies, but you may have to shop around to find insurers with VUL or IUL coverage. 

We found the top five universal life insurance companies to get you started:

• Guardian Life. This company offers variable, indexed, and equity-indexed policies at some of the lowest interest rates in the market (3.5% minimum).
• Mutual of Omaha. This company offers the best indexed universal life policy, which guarantees that your returns never go below zero, even if the market index is negative.
• Northwestern Mutual. This company offers the best variable universal life policy, with a wide range of mutual fund-like investment opportunities. 
• Nationwide. This company only offers UL, but no medical exam coverage is available to healthy policyholders.
• State Farm. This company only offers UL but has the strongest customer service and lowest complaint ratio compared to other companies on this list. 

Although it’s better known for car insurance, State Farm is one of the most competitive life insurance companies in the country. It offers a unique joint universal life policy that covers two people, typically you and your spouse, which is much more affordable than buying two separate policies. Read our State Farm life insurance review to learn more and compare rates.

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Case Studies: Exploring the Flexibility and Benefits of Universal Life Insurance

Case Study 1: John’s Flexible Premium Policy

John is a 35-year-old individual who is looking for a life insurance policy that offers flexibility in premium payments. He wants the ability to adjust his monthly rates based on his financial situation. After researching different options, John decides to go for a universal life insurance policy.

With this policy, he can pay extra money towards the cash value, which can be used to cover future premiums or increase the death benefit. John finds that the flexibility of universal life insurance suits his needs and provides him with peace of mind.

Case Study 2: Sarah’s Adjustable Death Benefits

Sarah, a 45-year-old professional, wants to have control over her life insurance coverage. She considers her current financial situation and future needs and realizes that her coverage requirements may change over time.

She decides to opt for a universal life insurance policy with adjustable death benefits. This type of policy allows her to increase or decrease the death benefits based on her changing circumstances. Sarah appreciates the ability to customize her coverage and knows that she can make adjustments as needed.

Case Study 3: Mark’s Investment Strategy

Mark, a 50-year-old investor, is interested in using his life insurance policy as part of his overall investment strategy. He wants to maximize his returns and have the flexibility to invest in different market indexes. After consulting with a financial advisor, Mark chooses an equity indexed universal life insurance policy.

This type of policy allows him to allocate a portion of his premiums to various investment options, potentially earning higher returns. Mark is excited about the potential for growth and the opportunity to supplement his other investments.

The Bottom Line on Universal Life Insurance

Universal life insurance is one of the most flexible types of permanent coverage. Policies last your whole life, and coverage with increasing death benefits will leave behind more money for your beneficiaries. You can also borrow against the cash value or use it to cover more expensive life insurance premiums in the future.

This flexibility doesn’t come without risks, and the insurance company cannot guarantee your investments will pay off. You will also pay higher rates for UL, so it’s important to assess your investment portfolio and compare life insurance quotes from multiple companies before you buy.

Ultimately, UL is not a suitable replacement for 401(k) plans or IRAs. So if you’re interested in buying universal life, we recommend speaking with your financial advisor.

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