Universal life insurance combines a death benefit with a savings account you can borrow from

Universal life insurance (UL) is a type of permanent life insurance that stays in force for your entire life, as long as you pay premiums. Unlike term life insurance, which covers you for a set number of years, universal life builds cash value — a savings component that grows tax-deferred and that you can access during your lifetime.

The way it works: part of your premium payment goes toward the death benefit (the amount paid to your beneficiaries when you die), and the rest goes into a cash value account. That account earns interest based on current market rates or a rate set by your insurance company, depending on the type of UL policy you choose. You can borrow against this cash value, withdraw from it, or use it to pay premiums if you need to skip a payment.

This flexibility is the main reason people choose universal life over term insurance. But it also means your premiums and death benefit can change over time, and you have more responsibility for keeping the policy active.

Key Takeaways

  • Universal life insurance lasts your entire life and builds cash value that you can borrow from or withdraw, unlike term insurance which expires after a set period.
  • Your premium is split between the death benefit and the cash value account, and the cash value grows tax-deferred based on interest rates set by the insurance company.
  • You can adjust your death benefit and premium payments during the life of the policy, giving you more control than traditional whole life insurance.
  • If your cash value drops too low, you must pay higher premiums to keep the policy active, or the coverage will lapse.
  • Universal life insurance costs less than whole life but more than term insurance, and the death benefit is not may provide to stay the same.

How premiums and cash value work together

When you pay a universal life premium, the insurance company deducts a mortality charge (the cost of the death benefit itself) and administrative fees from your payment. Whatever is left goes into the cash value account. The cash value then earns interest — the rate varies depending on market conditions and the type of UL policy you have.

This means your cash value can grow or shrink depending on how much you pay in, how much the insurance company charges, and what interest rate your account earns. If interest rates are low, your cash value grows slowly. If you stop paying premiums, your cash value can be used to cover the mortality charges and fees, which means it shrinks over time.

The insurance company sends you an annual statement showing your cash value balance, the interest earned, and the charges deducted. This transparency is important because it shows you whether your policy is on track or heading toward a lapse.

The difference between indexed and variable universal life

Indexed universal life (IUL) ties your cash value growth to a stock market index, such as the S&P 500. Your account earns a percentage of the index's gains, but usually with a cap — for example, you might earn up to 10% even if the index gains 15%. In exchange, if the index drops, your cash value does not fall below a floor (often 0% or 1%), so you do not lose money in down years.

Variable universal life (VUL) lets you direct your cash value into investment subaccounts — similar to mutual funds — and your returns depend entirely on how those investments perform. If the market rises, your cash value can grow faster than with indexed UL. But if the market falls, your cash value falls too, and you could face higher premiums to keep the policy active.

Traditional universal life uses a fixed interest rate set by the insurance company, which is simpler but offers lower growth potential than either indexed or variable options.

When you can access your cash value

You can borrow against your cash value at any time, usually at a rate set by your insurance company (often 6% to 8%). The loan does not have to be repaid, but any unpaid balance is deducted from the death benefit when you die. If you borrow more than your cash value, the policy may lapse.

You can also withdraw money directly from your cash value, up to the amount you have accumulated. Withdrawals reduce your death benefit dollar-for-dollar and may trigger income taxes if you withdraw more than the premiums you have paid in. Unlike loans, withdrawals do not have to be repaid.

Some policies allow you to take a policy loan without affecting the death benefit, depending on the terms. Always check your policy documents or call your insurance company before borrowing or withdrawing, because the rules vary.

How universal life premiums can change

Unlike whole life insurance, where your premium is locked in for life, universal life premiums can increase. If your cash value is not growing fast enough to cover the mortality charges and fees, your insurance company may raise your premium to keep the policy active. This can happen if interest rates drop, if you stop making payments, or if you reduce your death benefit.

You also have the option to raise or lower your death benefit during the policy's life, which will change your premium. Raising the death benefit usually requires a new medical exam. Lowering it does not, but it reduces the protection your beneficiaries receive.

The insurance company is required to notify you in writing if your cash value is projected to fall below the level needed to keep the policy active. At that point, you can increase your premium payments, reduce your death benefit, or let the policy lapse.

Universal life versus whole life and term insurance

Whole life insurance also lasts your entire life and builds cash value, but your premium is fixed and may provide never to increase. This stability costs more — whole life premiums are typically 5 to 15 times higher than term insurance for the same death benefit. Universal life premiums are lower than whole life but higher than term, and they can change.

Term insurance is the cheapest option and covers you for a specific period, such as 20 or 30 years. It has no cash value and no flexibility — you either pay the premium or lose coverage. But if you only need protection for a defined period (such as while your children are young or while you have a mortgage), term insurance is usually the better financial choice.

Universal life sits in the middle: more expensive than term, cheaper than whole life, and more flexible than both. It makes sense if you want permanent coverage, want the option to access cash value during your lifetime, and are comfortable with the possibility of premium increases.

What happens if you stop paying premiums

If you miss a premium payment on a universal life policy, the insurance company will use your cash value to cover the mortality charges and administrative fees. As long as your cash value is large enough, your coverage continues even without payments. But your cash value shrinks with each month that passes.

If your cash value drops to zero before you resume payments, your policy lapses and coverage ends. You will not be able to reinstate it without a new medical exam, and you may be denied if your health has changed. Some policies allow a grace period (usually 30 days) during which you can pay the overdue premium without losing coverage.

This is why universal life requires more active management than whole life or term insurance. You need to monitor your cash value and make sure you are paying enough to keep the policy active, especially if interest rates are low or if you have taken loans against the cash value.

Frequently Asked Questions

Can I use my cash value to pay premiums permanently?

Yes, if your cash value is large enough. Some people reach a point where their cash value earnings cover all the mortality charges and fees, so they stop making out-of-pocket payments. But this requires a substantial cash value and stable interest rates. If rates drop or you have taken loans, your cash value may not be enough to cover premiums indefinitely.

Is the death benefit may provide with universal life insurance?

No. The death benefit is may provide only if you pay the required premiums and your cash value stays above a minimum level. If your cash value drops too low, your death benefit may decrease or the policy may lapse. This is different from whole life, where the death benefit is may provide as long as you pay premiums.

What happens to my cash value if I surrender the policy?

If you cancel your universal life policy, you receive the cash value minus any surrender charges (fees the insurance company deducts for early termination). Surrender charges typically decrease over time and disappear after 10 to 15 years. You may owe income taxes on any gains above the premiums you paid.

Can I convert my universal life policy to a different type of insurance?

Some universal life policies include a conversion option that lets you switch to whole life or term insurance without a new medical exam. This is useful if your health changes or if you want to lock in a fixed premium. Check your policy documents or contact your insurance company to see if conversion is available.

Do I need a medical exam to get universal life insurance?

Most universal life policies require a medical exam, blood work, and a detailed health history. The amount of coverage you request and your age and health determine how extensive the exam is. Some companies offer simplified or no-exam policies, but these typically have higher premiums or lower maximum death benefits.