Universal Life Insurance

Universal life insurance is a type of life insurance that can last for your entire life, as long as you continue to pay premiums on it. These policies include the ability to also build up a cash value over time. You can eventually adjust and lower your premiums over time by using money accrued from the cash value to cover the cost.

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  • Written By
    Christian Simmons, CEPF

    Christian Simmons, CEPF

    Financial Writer, Certified Educator in Personal Finance

    Christian Simmons is a financial writer who has worked professionally as a journalist since 2016. As an active member of the Association for Financial Counseling & Planning (AFCPE), Christian prides himself on his ability to break down complex financial topics in ways that Annuity.org readers can easily understand.

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    Lamia Chowdhury
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    Lamia Chowdhury

    Financial Editor

    Lamia Chowdhury is a financial editor at Annuity.org. Lamia carries an extensive skillset in the content marketing field, and her work as a copywriter spans industries as diverse as finance, health care, travel and restaurants.

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    Stephen Kates, CFP®
    Stephen Kates, CFP®

    Stephen Kates, CFP®

    Principal Financial Analyst for Annuity.org

    Stephen Kates, CFP® is a personal finance expert specializing in financial planning and education. He serves as the Principal Financial Analyst for Annuity.org, where he delves into industry trends to support consumers and financial advisors on wealth management, annuities, retirement planning, and investing.

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  • Updated: January 24, 2024
  • 5 min read time
  • This page features 4 Cited Research Articles

What Is Universal Life Insurance?

Universal life policies are a form of permanent life insurance, meaning they can last your entire life. As long as you continue to cover your premiums, the policy will remain active.

One of the most attractive features of a universal life policy is its saving component.

When you pay premiums on the policy, some of the money over what is needed for the premium itself moves into the cash value of the policy, working like a savings account. Those savings, which are tax-deferred, can allow for a lot more flexibility than some other types of policies.

According to the Insurance Information Institute, you can alter your premiums over time if you have a universal life policy. For example, if the cash value has built up over years, you can lower the amount that you are paying for your premium if the cash value is sufficient to cover the rest.

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Types of Universal Life Insurance

On top of the traditional style of universal life insurance, there are several different types as well.

The first type is indexed universal life insurance. It works similarly to the traditional type, lasting your whole life as long as premiums are paid and offering the ability to build up cash value savings as well.

The key difference is that, in this version, the cash value’s earned interest is tied to the performance of a market index, such as the NASDAQ. This can be beneficial since it allows your cash value the chance to build up significantly over time depending on the index it is tied to.

Another type is variable universal life insurance, which essentially serves as the riskier but potentially more lucrative option compared to indexed universal life.

In a variable life insurance policy, the cash value can be invested. This naturally can lead to significant gains but also significant losses if the investments don’t pan out.

The final option is guaranteed universal life insurance, which functions significantly differently from the traditional type. With a guaranteed policy, your premiums are not flexible and cannot be changed. The policy also does not last as long as your life. Instead, you pick an age that coverage will end at, typically, at the older end of the spectrum.

Read More: Annuities vs. IUL

How Does Universal Life Insurance Work?

One of universal life insurance’s main benefits is the flexibility that it offers. Say that you take out a universal life policy and the cash value accumulates as you pay your premiums.

Then, 10 years down the line, you run into some sort of temporary financial difficulty where continuing to pay your full premium would be difficult. Instead of allowing the policy to lapse, you could alter your premium payments for a time by using the cash value to cover part or all of them.

The cash value can also be borrowed against, which is another added advantage.

A universal life policy also lasts your entire life as long as you continue to pay premiums. Unlike a term life policy, you don’t need to worry about your coverage lapsing after a set amount of time. As long as the premiums are paid, the policy will remain active.

Pros and Cons of Universal Life Insurance

As with other forms of life insurance, whether the policy is right for you will depend on your personal circumstances. A universal life policy may make sense for some people but not for others.

There are both advantages and disadvantages to opting for a universal life insurance policy.


A major advantage of a universal life policy is the cash value you can accumulate. This version of savings can be very useful in numerous ways.

You can take out loans against it, you can use it to adjust your premiums and, if the policy lapses, it can be returned to you so that you don’t have to worry about a scenario where you pay into a policy and end up with nothing.

The policy’s permanence is also advantageous in that you don’t have to worry about the policy eventually expiring and leaving you without coverage as long as you continue to pay into it.

Simply put, universal life policies are one of the most flexible and versatile options available.


There are potential drawbacks to opting for a universal life policy that can potentially be damaging to policy holders.

If your cash value is tied to an index or is being invested, then there could potentially be a never-ending question mark surrounding the financial stability of your policy.

For example, if you are using the cash value to pay a portion of your premium, you may end up in trouble if the cash value is not doing well and you end up eating through those savings. You then not only run the risk of ending up with little to no money if the policy lapses, but your premiums would also rise if part of them were no longer being paid with the cash value.

According to the New York State Department of Financial Services, there are significant concerns about rising costs as well.

Universal life policies typically increase in cost as you age. The cash value can be used to cover these rising costs, but policy holders can end up with large expenses if the cash value is exhausted.

You would then be hit with a significantly higher premium that will only grow since you must now directly cover all of the costs. Market volatility can play a major role here if your cash value takes a hit or does not grow at a rate that keeps up with the policy’s rising costs.

Universal Life vs. Whole Life

Universal life policies can be very similar to whole life policies. Like universal life, a whole life policy is permanent. This means that there is no term or expiration date on the policy. You will be covered for your whole life as long as you continue to pay premiums. Universal life is essentially a version of whole life.

One key difference is the premiums payments. In a universal life policy, the premiums are fluid. They can be lowered by using money stored up in the cash value component of the policy to help pay for them and they can also increase and become more expensive as the policy holder ages.

Whole life policies, on the other hand, typically have set premiums that do not change over time.

Another similarity is that both include cash value as part of the policy. But it can work differently with each type. With traditional whole life, the growth of the cash value may be less volatile than it can be with some types of universal life policies.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: January 24, 2024