What is Universal Life Insurance/Step by Step Guide

What is Universal Life Insurance

 Universal life insurance is the type of permanent life insurance that can offer a guaranteed death benefit, it can allow you to tap into the policy’s cash value, and may give you the flexibility to adjust your premium payments and death benefits.

With a universal life policy inclusive, the insured person is covered for the duration of their life as long as they pay the premium and fulfill any other requirements of their policy to maintain coverage.

Like many permanent life policies, universal life insurance combines a savings component called “cash value” with lifelong protection. When you pass away, the policy’s death benefit is paid out to your beneficiaries.

Every year, some owners of Universal Life policies receive a notice from their insurance company that their policy will be affected if they do not increase their payment.

They are concerned because they did not think their payment was ever supposed to increase. However, if you maintain a transparent cash value on your policy, universal life pays a death benefit to your beneficiaries even when you are dead.

How does universal life insurance work?

Universal life policies have two main parts. The first is the insurance. This is the part that pays out the death benefit when you die.

The second part is a cash value component. When you make a premium payment, the insurance company takes out the cost of the insurance, as well as any administrative fees, and puts the rest into your cash value account.

The main perk of universal life insurance is the ability to adjust premiums. These policies allow you to pay more than the “scheduled premium,” which is the amount of money due each payment period. If you choose to pay extra, the additional funds go into your cash account, increasing its value.

Alternatively, you can pay less than the scheduled premium and draw from your cash value to cover the difference. If you do this, make sure you have sufficient cash value to pay your premiums, or else your coverage may lapse.

Death benefit

You usually have the option to decrease your death benefit, which can be handy if you no longer need as much coverage. Some insurers also allow you to increase your coverage if you qualify, though this option is not as common.

One of the biggest decisions you’ll make in a universal life policy is choosing the type of death benefit you want to be paid out. You have two choices:

a. Level death benefit. In most cases, the death benefit amount remains the same throughout the life of the policy. For example, if you buy $200,000 of coverage and build up $70,000 in the policy’s cash value portion to help pay premiums, your beneficiaries receive $200,000 when you die.

b. Increasing death benefit. Your cash value balance is added to the death benefit. So, in the previous example, your beneficiaries would get $160,000: the death benefit plus the cash value. This option comes with higher premiums than the first. 

How Does Universal Life Insurance Work?

Universal life insurance is a type of permanent life insurance. Unlike term life insurance, which is meant for a specific period, such as 20 years, universal life insurance is in effect for the rest of your life (unless you stop making premium payments).

Some forms of universal life insurance also offer a cash value component. You can take money out of cash value via a withdrawal or loan. When you die, the insurance company will reduce the death benefit payout to your beneficiaries by the amount of any withdrawals or outstanding loans. But for some buyers, accessing cash value is more important than a full payout to beneficiaries later on.

some related life insurance companies

There are a few types of universal life insurance policies and it’s crucial to understand what you’re buying. Their costs and features are quite different.

Typically, guaranteed universal life has the lowest risk, while variable universal life has the most risk because the cash value is tied to stocks and bonds. On the flip side, you can potentially build more cash value with indexed universal life and variable universal life than guaranteed universal life.

If you’re considering a universal life insurance policy, think about how much risk you’re willing to take on. Don’t be sold on promises of big investment gains that might not come true. Be sure to examine the guaranteed portions on the policy illustration and not just the rosy projections.

Who Should Consider Taking Universal Life Insurance?

If you want life insurance coverage that lasts the duration of your life, you might consider a universal life insurance policy. For example, universal life insurance can fund a trust to take care of a special needs child or other dependents after you’re gone.

You might also consider a universal life insurance policy if you have big long-term savings goals and need both an investment vehicle and life insurance, but only after you’ve maximized other savings options such as retirement plans.

Types of Universal Life Insurance?

Universal life insurance can get pretty complicated when you start to unpack it. In fact, there are actually three main types to choose from. That’s three types of life insurance you definitely don’t need.

Indexed Universal Life

You’ve heard of the stock market, right? Have you heard of indexes like the S&P 500? The Dow Jones Industrial Average? Nasdaq? Those indexes are good indicators of how well—or not—the market is doing. For anyone with an indexed universal life insurance plan, their cash value is linked to one of these indexes. So, if the market is doing well, the cash value will go up.

But there’s a catch—the rate will always be lower than the performance of the index it’s tied to because the insurance company takes its hefty share in fees. And if the market is not doing well—you guessed it—the value of your plan will drop. Sound dishonest? Yep, we agree.

Guaranteed Universal Life

If you don’t like the idea of having your premiums tied to market performance, the insurance agent may try to sell you a no-lapse guarantee universal life policy instead.

With these policies, your premiums stay the same regardless of how well the index performs because the interest rates are set from the very beginning of the policy. As long as you pay your premium, you’ll have coverage for the rest of your life. This is the least risky universal life policy.

But here’s the rub. Since your premiums don’t adjust based on market performance, it builds hardly any cash value. That’s because guaranteed universal life insurance isn’t really designed to build cash. It’s too busy trying to keep up with the cost of insurance.

Variable Universal Life

Variable universal life insurance lets you invest your cash value into a mutual fund. A mutual fund is a pool of money managed by a team of investment pros. Your cash value makes up part of that pool, and it’s invested into lots of different companies at once.

Don’t get us wrong. Mutual funds are a fantastic way to invest because they diversify your risk (that’s just fancy Wall Street talk for making sure you aren’t putting all your investment eggs in one basket). But you’ve got much better options for investing in mutual funds than doing it inside a life insurance policy.

Here’s the deal: Life insurance is meant to support your loved ones if you die—it’s not supposed to be an investment. And all that investing ain’t cheap—insurance companies charge huge fees that’ll take a major bite out of your earnings.

As we’ll show you, it doesn’t matter which of these types of universal life insurance you choose. All three policies come with killer fees. If you want the best bang for your buck, you’ll keep your life insurance and your investments separate.

How Does Cash Value Life Insurance Work?

Universal life insurance, along with variable and whole life insurance, is the three amigos in the world of cash value insurance. They provide life insurance coverage, but they also act as savings accounts. Cash value is the cash build-up in that savings account.

Here are some things you should know, though, about each of the three amigos. Whole life insurance returns usually barely keep up with—and sometimes fall below—inflation. Universal life and variable life rates of return fluctuate more. And while they can outperform whole life, as we’ve said over and over again, the fees tacked onto universal life insurance policies will eat you alive.

That’s why you should never treat your life insurance as an investment. Life insurance has one job—to replace your income and provide for your family if you die. Always keep your investments separate from your life insurance.

What Happens to the Cash Value if I Don’t Use It?

Universal life insurance has a lot of disadvantages, but as we mentioned, the worst part of universal life insurance is what happens to your cash value when you die. The only payment your family will get is the death benefit amount. The insurance company keeps any cash value you managed to build.

Just let that sink in a minute.

Plus, if you ever withdraw some of the cash value, that same amount (or more) will be subtracted from your death benefit amount. That’s a lose-lose situation. You can faithfully invest for decades, but inevitably that money will go back to the insurance company.

The truth is, that’s how some life insurance companies make their money—and it’s why they’re so quick to sell universal life insurance to you in the first place. Don’t let them fool you!

How Much Do I Need to Have to Get Universal Life Insurance Cost?

The cost of universal life insurance depends on your age, gender, overall health, and habits. But one thing’s for sure regardless of any of those things: You’ll get a cheaper—and better—deal with term life insurance.

The fees you’ll pay for a cash value universal life insurance policy are huge. There are fees to have insurance in the first place, fees to cover commissions, and fees to cover expenses for the insurance company. And the thing is, because of those crazy-high fees, you’ll build zero cash value in the first few years.

Trust us: The insurance company will make more off of a universal life insurance policy than you.;


Universal life insurance is a form of permanent life insurance which have a lifetime lasting coverage on the insured provided the insured makes premium payment.

It gives you the flexibility to adjust your premium and death benefits when needed. This is in contrast to term life insurance which only provides coverage for a set period of time, say 15 or 20 years. Universal life insurance can be purchased by individuals but is also regularly offered by employers as group universal life insurance.

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