Most life insurance shoppers will have to decide between term life insurance and permanent life insurance. While term insurance is straightforward, permament insurance comes in a variety of forms, each with a different way of accumulating money over time.

One popular form of permanent insurance is universal life insurance. While the cash value provides some flexibility with the policy, it can be more confusing and expensive than most shoppers will need.

What is universal life insurance?

Universal life insurance, also referred to as UL insurance, is a type of permanent life insurance that lasts your entire life, as long as you keep paying premiums while the policy is in force. When you die, it pays out a tax-free cash sum, called the death benefit, to your beneficiaries.

What makes universal life insurance different from other types of life insurance, is that it allows policyholders to use the policy’s cash value to pay for premiums. With universal life, the interest rate earned on the cash value is subject to change, while it is fixed with other policies, like whole life insurance. Even though the policy is permanent, its offerings may be good for someone who isn't ready to commit to a specific rate for the rest of their life.

How does universal life insurance work?

With universal life insurance, a portion of your monthly premiums goes toward a component called the cash value, which can earn a small amount of variable interest, and you can use the built-up cash value to pay for part of your monthly premiums. Once you die, the remaining cash value will go toward the death benefit.

However, just because there is a cash benefit to a universal life insurance policy doesn’t mean that it’s the best option to save money for the future. The variable interest rate often realizes a much smaller gain than you could get by investing the same amount in an IRA or 401(k). For example, the rate of return on universal life insurance is near 2%, while the rate of return on an IRA or 401k that matches historical stock market averages is 8%. Some of the best savings accounts can get over 2% interest, and the money would be available to you at any time.

The lower rates of return in a universal life insurance policy are why many financial advisors recommend buying term life insurance and investing the price difference.

How much does universal life insurance cost?

Because universal life insurance policies offer more than just a traditional term life insurance policy, the premiums tend to be a little higher. However, the premiums are still lower than some other types of permanent life insurance policies, such as final expense insurance.

Rates are for a male with a Preferred (nonsmoker) classification, for $100,000 in coverage and no optional riders.

Average universal life insurance rates by age

Methodology: Quotes based on policies offered by Policygenius in 2020.

Who should buy universal life insurance?

Similarly to other permanent life insurance policies, a universal life insurance policy is generally for people who have very specific needs. An individual with a high net worth may want to take advantage of the tax-deferred savings component, while parents of a child with special needs may need a universal policy due to the high costs associated with taking care of their child.

A universal life insurance policy is also a good fit for someone who is looking for some flexibility in their life insurance. Because it allows for adjustments in premium payments and the death benefit, you won’t have to sacrifice protection for your family if your financial health changes.

Universal life insurance vs term life insurance

Term life insurance is a simpler form of life insurance: you pay your premiums for a set term and your family will receive a death benefit if you die during that time. If you outlive the term and the policy expires, you’ll need to buy a new life insurance policy or your family won’t collect a death benefit when you die. The simplicity of term life insurance makes it cheaper than permanent life insurance policies and a better option for people that don’t require a life insurance policy with versatility.

Universal life insurance, like other types of permanent life insurance, differs from term life insurance in key ways:

1. Universal life insurance is permanent; term life insurance lasts for a set period of time.
2. Universal life insurance has a cash-value component; term life insurance cannot be considered a savings vehicle.
3. Universal life insurance is 5 to 15 times more expensive than term life insurance.

How universal life insurance compares to other permanent policies

Aside from universal life insurance, there are several other types of permanent life insurance policies to choose from, each differing in how the cash value can grow and be used. These include whole life insurance, variable life insurance, and variable universal life insurance.

Whole, variable, and variable universal life insurance

• Whole life: A whole life insurance policy offers a cash value component just as a universal life insurance policy does, but without the flexibility to adjust your payments if your financial situation changes. Due to its high cost, 45% of whole policies are abandoned within the first ten years of the policy, significantly decreasing the cash value.
• Variable life: Someone who is looking for more diversity when utilizing life insurance as a savings vehicle may consider a variable life insurance policy. Variable life insurance offers a range of investment options, including stocks, mutual funds, and bonds. Unlike universal life insurance, it doesn’t offer the same amount of premium payment and death benefit flexibility.
• Variable universal life: A variable universal life insurance policy is a combination of variable life insurance and universal life insurance. It allows for premium and death benefit adjustments, but has a more complex investing component.

→ Check out our guide on whole vs. universal vs. guaranteed universal life insurance

Is universal life insurance worth it?

A univeral life insurance policy can be very expensive, and for most people, purchasing a term life insurance policy and investing the difference in an IRA, 401(k), or traditional investments are going to provide more returns for a lower cost. But for individuals with a high net worth, a universal life insurance policy can offer a supplememtal investment option that also protects the financial security of their loved ones. Speaking to an life insurance adviser at Policygenius or a financial adviser is the best way to determine whether a universal life insurance policy fits into your financial plan.