What Is Universal Life Insurance and How Does It Work?

Updated January 13, 2023

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Life insurance can protect your family and loved ones if the unimaginable happens. When you purchase universal life insurance, the policy remains in effect for the lifetime of the insured person.

In addition to lifetime protection, universal life insurance has a built-in cash value that grows over time and earns interest. And this type of policy comes with flexible premiums, so you can raise or lower your payments if your circumstances change.[1]

A universal life insurance policy could be a good option, depending on your financial goals. But before investing in any kind of life insurance, you’ll want to understand how it works and its pros and cons.

How does universal life insurance work?

Universal life insurance comes with lifetime coverage, which means it doesn’t expire. The policy remains in effect for the rest of your life, assuming you continue paying the premiums. Most people choose to purchase universal life insurance for its lifetime coverage, flexible premiums, and cash value growth.

Cash value

When you pay your premiums, a portion will go toward the death benefit and another portion will go toward building up your cash value. As your cash value grows over time, it’ll begin to earn interest. And the funds grow on a tax-deferred basis, so you won’t owe any taxes on your earnings or interest.[2]

Once the funds have accumulated, you can borrow against the cash value of the policy. You can access the cash value of your universal life insurance policy in a few different ways:[3]

  • Surrender value: If you no longer want your policy, you can surrender it to your insurer and receive the cash value in return.

  • Loan collateral: You can also take out a policy loan and use your cash value as collateral. But you’ll pay interest, and if you pass away before the loan is repaid, the insurance company will likely deduct the remaining loan balance from your death benefit amount.

  • Premium payment: You can also use your cash value to make your premium payments.


One of the main advantages of choosing universal life insurance is the ability to adjust your premiums. You can choose to pay more or less than your scheduled premium payment.

If you pay extra on your premiums, the additional funds will go toward your cash value. Alternatively, if you need to pay less than your scheduled premium payment, you can draw from your cash value to cover the difference.

Universal life insurance may cost more than other types of life insurance, like term life, because of its cash value component.[4] The exact cost will depend on your age, your overall health, your lifestyle, and the insurance company you choose.

Good to Know

A life insurance premium is the amount you pay to an insurance company for a policy. Depending on the insurer and policy, you may be able to pay your premium monthly, quarterly, or annually.

Death benefit

When you purchase universal life insurance, you have to decide what kind of death benefit you want to be paid. You have two options to choose from:[5]

  • Level death benefit: If you choose a level death benefit, the benefit amount stays the same over the life of the policy, but the insurer’s obligation decreases. For example, let’s say you purchase $250,000 in coverage and save an additional $50,000 in cash value. When you die, your beneficiaries will receive $250,000 — $50,000 from the cash value and $200,000 from the insurance company.

  • Increasing death benefit: If you choose an increasing death benefit, your beneficiaries will receive the cash value and the death benefit when you die. So if you have $250,000 in coverage and $50,000 in cash value, your beneficiaries will receive the entire $300,000.

Types of universal life insurance

If you’re interested in buying universal life insurance, you can choose from three different types — guaranteed, indexed, and variable.

Guaranteed universal life insurance

If you choose guaranteed universal life insurance, you’ll receive a death benefit and premium payments that won’t change over time. You’ll choose a specific age when the policy will end — 80, 90, or 100, for example. The higher the age limit, the higher your premiums will be.

Unlike other policies, guaranteed universal life insurance doesn’t build cash value, which allows you to keep your premiums low. This type of coverage is a good option for someone who wants lifetime coverage but doesn’t care about the cash value component.

Indexed universal life insurance

Indexed universal life insurance comes with lifetime coverage and allows you to build some cash value. Your cash value is tied to a stock market index, unlike other policies, which rely on non-equity earned interest rates.

Indexed universal life insurance is more complex than other insurance products since the policy comes with participation rates and caps. Make sure you understand the minimum interest rate and whether your insurer limits your rate of return. This type of policy is best for someone who’s comfortable taking on more investment risks.

Variable universal life insurance

Variable universal life insurance also comes with death benefits, a cash value component, and flexible premiums. With this type of policy, your insurer lets you choose how to invest your cash value. You can choose from stocks, bonds, and mutual funds, and you can invest in multiple accounts.

Variable universal life insurance may be a good option for someone who’s comfortable actively managing their own investments. But this type of policy does tend to cost more than term life insurance.

See Also: Guaranteed Acceptance Life Insurance: What Is It and Do You Need It?

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Other types of life insurance

Universal life insurance may not be the best option for everyone — here are some additional types of life insurance you can explore.

Term life insurance

When you sign up for term life insurance, you receive coverage for a specific period of time. This policy only comes with a death benefit, and there’s no savings component. If the policy expires before you die, your beneficiary won’t receive a payout.[6]

Term life insurance tends to be the least expensive type of insurance because the benefits last for a set period. You may be able to renew your policy once it’s set to expire, but the premiums will be recalculated based on your age, so you might pay more than you did when you took out your original policy.

Check Out: Types of Term Life Insurance

Whole life insurance

Whole life insurance is similar to universal in that it provides lifetime coverage and a savings component. Your cash value accrues on a tax-deferred basis, and your premium amount will stay the same over the life of the policy.[6] Whole life insurance tends to be less flexible than universal coverage, but your cash value is guaranteed to grow.

Learn More: Term Life vs. Whole Life Insurance: What’s the Difference?

Pros and cons of universal life insurance

Universal life insurance comes with many benefits, including flexibility and a savings component. It’s important to weigh both the pros and cons before buying any type of life insurance.


  • Flexible premiums: Universal life insurance lets you change the size and frequency of your premium payments. This gives you the option to pay more in the beginning to build your cash value and pay less if your financial situation changes in the future.

  • Lifetime coverage: As long as you stay on top of your premium payments, universal life insurance coverage will last your entire lifetime.

  • Option to increase death benefit: Many insurance companies give you the option to increase your death benefit, though you may have to pass another medical exam first.[1]


  • Potential low interest on cash value: If interest rates are rising, your cash value will likely do well, but if they drop, it could cause your policy to underperform.

  • More responsibility than other policies: You’re responsible for monitoring your policy to ensure it doesn’t become underfunded. Not making timely payments could cause you to lose coverage.

  • Potentially high fees: Universal life insurance can come with fees, so you should make sure you understand the costs involved before buying this type of policy.

Best universal life insurance companies

It’s always a good idea to shop around for life insurance and compare quotes from several different companies to find a policy that best suits your needs. Here are five insurers you may want quotes from:

Universal life insurance FAQs

If you have more questions about universal life insurance, check out answers to these frequently asked questions.

  • Term life insurance only provides death benefits, and coverage is only available for a fixed period of time. In comparison, universal life insurance comes with a savings component and lifetime coverage.

    Universal and whole life insurance are similar in that both offer lifetime coverage and you can build cash value over time. But whole life insurance tends to be more expensive and have fixed premiums, and the cash value comes with fixed interest rates.

  • You aren’t required to purchase life insurance. But if you have a family or people who depend on you for financial support, it may be a good idea. Buying a life insurance policy is a big decision, so you may want to consult with a financial advisor or insurance agent to find out what type of policy will work best for your unique situation.

  • In addition to providing lifetime coverage, a portion of your premiums goes toward building up your cash value. As your cash value accumulates, you can borrow against the funds or use them to pay a portion of your premiums.

  • Your universal life insurance premiums will vary depending on your age, your health, your lifestyle, and the insurance company you choose. The best way to lower your premiums is by shopping around and comparing quotes from several different insurance companies.

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  1. Insurance Information Institute. "What are the different types of permanent life insurance policies?." Accessed January 11, 2023
  2. National Association of Insurance Commissioners. "What Type of Life Insurance is Right for You?." Accessed January 11, 2023
  3. New York Department of Financial Services. "Universal Life Insurance." Accessed January 11, 2023
  4. Insurance Information Institute. "What are the principal types of life insurance?." Accessed January 11, 2023
  5. New York Department of Financial Services. "Types Of Life Insurance Policies." Accessed January 11, 2023
  6. National Association of Insurance Commissioners. "Life Insurance." Accessed January 11, 2023
Jamie Johnson
Jamie Johnson

Jamie Johnson is a Kansas City-based personal finance writer whose work has been featured on several of the top finance and business sites in the country, including Insider, Credit Karma, Bankrate, Rocket Mortgage, Fox Business, Quicken Loans, and The Balance. For the past six years, she's dedicated more than 10,000 hours of research and writing to more than 2,000 articles about personal finance topics.