Universal life insurance

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


Universal life insurance is a permanent life insurance policy with the added flexibility of using the policy’s cash value to pay for premiums. With universal life, the interest rate earned on the cash value is subject to change, whereas it is fixed with whole life insurance.

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How universal life insurance works

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. When you die, it pays a tax-free cash sum (the death benefit) to your beneficiaries.

With universal life insurance, a portion of your monthly premiums go toward a component called the cash value. While you’re alive, after a certain amount of time, you can use the built-up cash value to pay for or lower your monthly premiums. Once you die, the remaining cash value will be counted toward the death benefit.

As long as you don’t withdraw the cash value or use it to pay premiums, 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.

With universal policies, you earn a small amount of interest on the cash value. The interest rate, set by the insurer, is variable and will change over time.

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 UL is near 2%, while the rate of return on an IRA/401k, if it matches with historical stock market averages, is 8%. In contrast, the best savings accounts get over 2% interest. So you'd not only be earning money at the same rate, it would also be available to you at any time.

This lower rates of return are one why many advisors recommend buying term life insurance (which is 6 to 10 times cheaper than permanent life insurance) and investing the price difference.

Who is universal life insurance for

Universal life insurance, like all forms of permanent life insurance, is generally for people with complicated financial situations. Examples include people with high net worth and people with children with special needs.

How universal life insurance compares to term life insurance

Term life insurance is “pure” life insurance: you pay premiums for a set term, and during that time, your family will get a death benefit if you die. If you outlive the term, the policy expires and you and your family get no death benefit.

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 term.
  2. Universal life insurance has a cash-value component; term life insurance does not.
  3. Universal life insurance is 6 to 10 times more expensive than term life insurance.
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How universal life insurance compares to other permanent policies

There are several types of permanent life insurance, and they each differ primarily in how the cash value grows and can be used. These tables detail how universal life insurance stack up against whole life insurance, variable life insurance, and variable universal life insurance:

Universal life insurance vs. whole life insurance

FeatureUniversal lifeWhole life
DurationLifeLife
Guaranteed Death BenefitYes (But you can choose to adjust)Yes
Guaranteed Cash ValueProtected from risk, but can be depleted to pay premiumsYes
How Cash Grows (or Shrinks)Variable interest rate set by insurerEarns interest at a predetermined fixed rate
PremiumsVaries, up to the customer (subject to federal tax laws)Level

Universal life insurance vs. variable life insurance

FeatureUniversal lifeVariable life
DurationLifeLife
Guaranteed Death BenefitYes (But you can choose to adjust)Yes
Guaranteed Cash ValueProtected from risk, but can be depleted to pay premiumsNo
How Cash Grows (or Shrinks)Variable interest rate set by insurerSub-accounts (pool of investor funds offered by insurer)
PremiumsVaries, up to the customer (subject to federal tax laws)Level

Universal life insurance vs. variable universal life insurance

FeatureUniversal lifeVariable Universal Life
DurationLifeLife
Guaranteed Death BenefitYes (But you can choose to adjust)Yes
Guaranteed Cash ValueProtected from risk, but can be depleted to pay premiumsProtected from risk, but can be depleted to pay premiums
How Cash Grows (or Shrinks)Variable interest rate set by insurerSub-accounts (pool of investor funds offered by insurer)
PremiumsVaries, up to the customer (subject to federal tax laws)Varies, up to the customer (subject to federal tax laws)

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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