Universal life insurance

Looking to build a tax-free inheritence and protect your family? Find out if universal life insurance is right for you.

What is universal life insurance?

Universal life insurance is a type of permanent life insurance that lasts your entire life, as long as you keep paying premiums to keep it active. It pays a tax-free cash sum to your beneficiaries at the end of your life, called a “death benefit.”

Universal life insurance is similar to whole life insurance in that a portion of your monthly premiums go toward a savings component of the policy, called the “cash value.” The cash value will be included in the death benefit payment, so as your cash value grows the insurer’s commitment to cover the death benefit shrinks. Eventually, the cash value makes up all of the death benefit.

How it works

  1. Universal life insurance pays out a tax-free lump sum to your beneficiaries when you die, called a “death benefit.” The bigger the sum, the more expensive the policy premiums.
  2. You’ll pay monthly or annual premiums to keep the policy in force and it will remain active your whole life, as long as you keep paying.
  3. Each month, a certain amount of your premium goes toward the policy’s savings plan, called the “cash value.” The insurance piece of the death benefit shrinks over time as the cash value grows, until eventually the cash value makes up 100% of the money the insurance policy will pay out.
  4. As the cash value grows, universal life insurance allows you to use the cash value to pay for your monthly premiums.
  5. You’ll earn a small amount of interest on the cash value. The interest rate, set by the insurer, is variable and will change over time.

Universal life insurance is essentially a version of whole life insurance but with the added flexibility of using the policy’s cash value to pay for premiums. However with universal life the interest rate earned on the cash value is subject to change, whereas it is fixed with whole life insurance. Here’s a comparison of both insurance types:

Universal Life OverviewWhole Life Overview
Guaranteed Death BenefitYesYes
Guaranteed Cash ValueProtected from risk, but can be depleted to pay premiumsYes
How Cash Grows (or Shrinks)Fixed interest rateEarns interest at pre-determined rate
PremiumsVaries, up to the customer (subject to federal tax laws)Level

Both universal life and whole life insurance are much more complicated and expensive than term life insurance, and Policygenius recommends against them for most shoppers. If you live a long life, your beneficiaries will eventually get back only what you contributed to the policy, plus a small amount of interest—probably less than your money would have generated in another type of retirement account. And if you should die prematurely, the payment amount your beneficiaries receive could have been obtained with a term policy with much cheaper premiums.

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As with most forms of life insurance you can add optional coverage onto your policy by purchasing riders. All riders add incremental cost to your premiums. Below are some common riders:

Spouse insurance rider

Allows your spouse to be covered on your policy for an additional cost, without your spouse having to take out a whole policy themselves.

Long term care rider

Cover the cost of long-term care in your senior years in the event that you require it and your health insurance policy won’t pay. Nursing home costs or at-home care are examples of covered costs. Payments for the healthcare providers will be made monthly.

Family income benefit rider

A family income benefit rider provides steady income to beneficiaries to cover monthly costs beyond the lump-sum death benefit in the event the insured dies prematurely,. The amount and duration of these monthly payments are determined when purchasing the rider.

Pros & cons of universal life insurance

Reasons to buy universal life insurance

  • Build savings that will grow consistently and earn a small amount of interest
  • Create tax-free inheritance for beneficiaries (applicable to high net-worth individuals whose inheritance will be subject to estate tax)
  • Protect your family from debts like mortgage and student loans in in the event of your untimely death
  • Cover final expenses like funeral and other end-of-life costs

What universal life insurance won’t provide

  • Variable interest rate on the cash value that you contribute over the course of your life. Risk of investing lots of cash that realizes a much smaller gain than you could get by investing the same amount in an IRA or 401(k)
  • Much more expensive than term life insurance for the same coverage amount for your beneficiaries

Want to keep learning? Read our full analysis on the pros and cons of term life vs whole life policies.

Other types of permanent life insurance

Whole life insurance

A simpler form of permanent life insurance than universal life. Whole life insurance offers death benefit coverage that gradually reduces the insurer’s commitment as the cash value builds, just like universal life insurance. But whole keeps your interest rate on the cash value fixed for life, and doesn’t allow the cash value to be used to pay monthly premiums.

Variable life insurance

Similar to whole life insurance except it allows more investment options for the cash value component. Investment funds with variable rates of return will reflect broader market trends and potentially give you a better return on investment than whole life—but with more risk.

Final expense life insurance

A type of permanent life insurance usually used by seniors, final expense insurance is meant to cover any end-of-life costs and outstanding debts. Policies are typically sold for smaller coverage amounts—$10,000 or $25,000 for example.

Policies such as variable universal life insurance combine components of the above, blending the investment flexibility of variable life with the ability to use the cash value to pay monthly premiums offered in universal life. Many insurers offers different options, so be sure to ask for the features that suit your needs. You may also want to consult a financial professional before investing in one of these complicated life insurance policies.

Consider term life insurance

Term life insurance

Many shoppers prefer the simplicity and affordability of term life insurance over complicated products like universal life to get the coverage they need to protect their loved ones. They then invest their savings elsewhere for a better rate of return.

Learn more about term life insurance.

Learn more about universal life insurance

Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.


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