Universal life insurance lets you adjust your death benefit and premiums after you buy the policy, and builds a cash value account that earns interest

A universal life (UL) insurance policy is permanent coverage that stays in force for your whole life as long as you pay premiums. Unlike term life, which expires after a set number of years, universal life has two moving parts: a death benefit your beneficiaries receive when you die, and a cash value account that grows inside the policy and earns interest at a rate set by the insurance company.

The premiums you pay are split between the death benefit (the insurance cost) and the cash value account. As the cash value grows, you can borrow against it, withdraw from it, or use it to pay your premiums. This flexibility is the main reason people choose universal life over term or whole life policies.

The trade-off is complexity. Your policy's cost and performance depend on interest rates, how much you withdraw, and how long you live. If interest rates drop or you don't pay enough premium, your cash value can shrink and your policy can lapse — meaning your coverage ends and you lose the death benefit.

Key Takeaways

  • Universal life policies have a death benefit and a cash value account that earns interest, and you can adjust the death benefit amount after purchase.
  • Your premium is split between the cost of insurance and deposits to the cash value account, and the insurance company sets the interest rate the cash value earns.
  • You can borrow against or withdraw from the cash value, but doing so reduces the death benefit and can cause the policy to lapse if the account runs dry.
  • If interest rates fall or you pay less than the target premium, the cash value may not grow fast enough to cover the insurance cost, and you may need to pay more to keep the policy active.

How the premium split works between insurance and savings

When you pay a universal life premium, the insurance company deducts a monthly cost of insurance (COI) from your payment. This cost covers the actual death benefit protection and the company's overhead. The rest goes into your cash value account. The COI rises as you age, because the risk of death increases.

The insurance company publishes a target premium — the amount they recommend you pay each month to keep the policy on track. You can pay more than the target (which builds cash value faster) or less than the target (which slows growth). You can also skip a payment if your cash value is large enough to cover that month's COI. This flexibility is why universal life appeals to people whose income varies or who want to adjust their coverage over time.

The cash value earns interest at a rate the insurance company sets, usually between 2% and 4% per year depending on market conditions and the company's investment performance. Some universal life policies have a may provide minimum rate (often 1% or 2%), so your cash value will not shrink even if the company's investments perform poorly. Others have no floor, which means the rate can drop to zero in a severe downturn.

When and how you can access the cash value

Once your cash value reaches a certain amount, you can borrow against it or withdraw from it. A loan does not count as income and is not taxed, but you pay interest on the borrowed amount (usually 6% to 8% per year). A withdrawal is tax-free up to the amount you paid in premiums; anything above that is taxed as ordinary income. Both reduce the cash value and the death benefit.

If you withdraw or borrow more than the cash value can support, or if interest rates drop and the cash value does not grow fast enough, the policy can lapse. When that happens, your coverage ends and you lose the death benefit. You will receive notice before this occurs, and you can prevent it by paying a larger premium or reducing the death benefit amount.

Some people use universal life as a way to fund long-term care or supplement retirement income. Others use it purely as a death benefit and never touch the cash value. The choice depends on your financial situation and whether you want the flexibility or prefer the simplicity of a fixed-premium whole life policy.

How adjusting the death benefit works

Universal life lets you raise or lower the death benefit after you buy the policy, without reapplying or taking a new medical exam (though raising it significantly may require underwriting). Lowering the death benefit reduces your monthly COI, which means more of your premium goes into cash value. Raising it increases your COI and may require you to pay a higher premium to keep the policy on track.

This flexibility can be useful if your financial situation changes. If you pay off a mortgage or your children grow up, you may not need as much coverage and can lower the benefit to reduce cost. If you take on new debt or have another child, you can raise it. The insurance company will adjust your policy within days or weeks.

The risk of policy lapse and how to prevent it

A universal life policy lapses when the cash value runs out and you cannot pay the next premium. This happens most often when interest rates fall, because the cash value earns less and grows more slowly. If you have been paying the target premium and relying on interest to cover future COI increases, a rate drop can force you to pay more or watch the policy fail.

To prevent lapse, monitor your policy's performance each year. Your insurance company sends an annual statement showing the current cash value, the projected cash value in future years, and the premium needed to keep the policy in force. If the projection shows the cash value declining, you have time to pay a larger premium or reduce the death benefit. Many people set a phone reminder to review the statement when it arrives.

If you are unsure whether your policy is on track, contact your insurance agent or the company's customer service line. They can run a projection based on current interest rates and show you exactly what premium you need to pay to keep coverage active until age 100 or 120 (depending on the policy).

Universal life versus whole life and term life

Whole life insurance also builds cash value and lasts your whole life, but the premium is fixed and does not change. You cannot adjust the death benefit, and the cash value grows at a rate the company guarantees. Whole life costs more per month than universal life, but you do not have to worry about the policy lapsing or interest rates affecting your coverage. It is simpler but less flexible.

Term life insurance covers you for a set period (10, 20, or 30 years) and costs much less than universal life. When the term ends, coverage stops and you get nothing back. Term is the right choice if you need coverage for a specific time period, like until your mortgage is paid off. Universal life makes sense if you want permanent coverage and the ability to adjust your benefit or access cash value.

Universal life sits in the middle: more flexible than whole life, but more expensive and complex than term. The right choice depends on how long you need coverage, whether you want to access the cash value, and how much you want to pay each month.

How interest rates and policy performance affect your costs

The interest rate your cash value earns is set by the insurance company and can change monthly or annually. When rates are high, your cash value grows faster and you may be able to pay less premium or skip payments. When rates are low, growth slows and you may need to pay more to keep the policy on track. This is the biggest risk of universal life: you have permanent coverage, but your cost is not permanent.

Some universal life policies offer a may provide interest rate for a set period (often 10 years), after which the rate can change. Others have a may provide minimum rate that protects you if the company's investments perform poorly. Read your policy documents to understand what rate you are locked into and what can change.

If you bought a universal life policy 10 or 15 years ago when interest rates were higher, your cash value may have grown faster than expected. If rates have since fallen, your policy may now require a higher premium to stay on track. This is not the insurance company's fault — it is how the product works. Before buying universal life, ask your agent to show you a projection assuming lower interest rates, so you understand the worst-case scenario.

Frequently Asked Questions

Can I stop paying premiums if my cash value is large enough?

Yes. If your cash value is large enough to cover the monthly cost of insurance, you can skip a payment and the company will deduct the COI from your account. However, if you skip too many payments and the cash value runs out, your policy will lapse. Monitor your statement to make sure the cash value is declining slowly enough that it will last as long as you need coverage.

What happens if I borrow from my cash value and die before I repay it?

The outstanding loan balance is deducted from the death benefit your beneficiaries receive. If you borrowed $50,000 and your death benefit is $250,000, your beneficiaries get $200,000. The loan does not have to be repaid during your lifetime, but it reduces what your family receives.

Is universal life a good investment?

Universal life is insurance first and an investment second. The interest rates are typically lower than what you could earn in a stock market index fund or bond fund. Most financial advisors recommend buying term life for protection and investing extra money separately if you want growth. Universal life makes sense if you want permanent coverage and the flexibility to access cash value, not as a primary investment strategy.

Can I convert my term life policy to universal life?

Many term life policies include a conversion option that lets you switch to permanent coverage (universal life, whole life, or variable universal life) without a new medical exam. The conversion usually must happen before your term expires or within a set window after. Check your term policy documents or ask your agent whether conversion is available and what it would cost.

What if my policy lapses — can I get coverage back?

If your policy lapses, you lose the death benefit and the coverage ends. You can reapply for a new policy, but you will need to pass a medical exam and your rates will be based on your current age and health. If your health has declined since you bought the original policy, a new policy will cost significantly more. This is why monitoring your universal life policy and preventing lapse is important.