Universal life insurance costs less upfront than whole life, but the premiums can rise later and the death benefit can shrink if the cash value account performs poorly

Universal life insurance (UL) is permanent coverage that stays in force for your whole life if you pay the premiums. Unlike term insurance, which expires after 10, 20, or 30 years, UL builds a cash value account that earns interest. That cash value can be borrowed against or withdrawn, and it helps pay your premiums if you stop making payments yourself.

Whether it is worth buying depends on what you need the money for and how long you plan to hold the policy. UL works well if you want permanent coverage at a lower starting cost than whole life, or if you might need to access cash from the policy later. It is a poor fit if you want predictable, locked-in premiums, or if you only need coverage for a set number of years.

Key Takeaways

  • Universal life premiums start lower than whole life but can increase over time if the cash value account does not earn enough interest to cover the cost of insurance.
  • You can borrow from or withdraw money from the cash value account, but doing so reduces the death benefit unless you repay it.
  • If you stop paying premiums, the policy can use the cash value to keep itself in force, but only as long as the account has enough money.
  • Universal life makes sense if you want permanent coverage with flexibility; it is riskier if you need premiums to stay the same or if you cannot afford a premium increase later.
  • Term insurance is cheaper if you only need coverage for 20 or 30 years; whole life is better if you want may provide premiums and may provide cash value growth.

How universal life premiums work and why they can change

When you buy a UL policy, you pay a target premium — the amount the insurance company suggests you pay each month or year. This target is lower than a whole life premium for the same death benefit, often by 30 to 50 percent. But the target is not a may provide. The actual premium you owe depends on three things: how much the cash value earns, how much the insurance costs (which rises as you age), and any fees the company charges.

The insurance company deducts the cost of insurance and fees from your cash value account each month. If the cash value earns enough interest to cover those costs, your premium stays at the target. If interest rates fall or the account underperforms, the deduction grows larger than the interest earned, and the cash value shrinks. When the cash value gets too small, the company sends you a notice that your premium must rise to keep the policy in force.

This is the biggest risk of UL: a premium increase can come years or decades into the policy, when your income may be lower or your health may have changed so much that you cannot get a new policy. Some people buy UL expecting to pay the target premium forever, then face a shock when the bill doubles or triples.

When the cash value account helps and when it hurts

The cash value is the policy's main selling point. Money in the account earns interest (the rate varies by company and policy type), and you can borrow against it or withdraw it while you are alive. If you need money for a medical bill, home repair, or other emergency, you have access to it without selling an asset or taking out a loan elsewhere.

But accessing the cash value has a cost. Any amount you withdraw or borrow reduces the death benefit dollar-for-dollar unless you repay it. If you borrow $50,000 from a $500,000 policy and never repay it, your beneficiaries receive $450,000 instead. Loans also accrue interest, and if you do not repay them, that interest is deducted from the death benefit too.

The cash value also depends on how well the underlying investments perform. Some UL policies let you choose how the cash value is invested (variable universal life, or VUL), which means better returns are possible but so are losses. Other policies have the insurance company invest the money (traditional UL), which is safer but offers lower returns. If you choose VUL and the market falls, your cash value falls with it, and your premiums may rise to compensate.

Universal life versus term insurance: the cost difference

A 35-year-old in good health might pay $30 to $50 per month for a $500,000 term life policy lasting 20 years. The same person buying a $500,000 universal life policy might pay $80 to $120 per month at the start. Over 20 years, term costs roughly $7,200 to $12,000 total; UL costs roughly $19,200 to $28,800 total in the first 20 years alone.

The trade-off is that term expires after 20 years and you have nothing left — no cash value, no coverage, no refund. UL stays in force for life (if premiums are paid or the cash value is large enough), and you can access the cash value while alive. If you die at age 85, your beneficiaries receive the full death benefit from a UL policy; with term, you would have had no coverage for the last 30 years of your life.

Term is the right choice if you only need coverage until your kids finish college or your mortgage is paid off. UL is worth the extra cost if you expect to need coverage past age 65, or if you want the option to borrow from the policy later.

Universal life versus whole life: predictability and guarantees

Whole life insurance is the other permanent option. It costs more than UL — often 50 to 100 percent more — but the premiums are may provide never to rise. The cash value growth is also may provide, usually at a rate set when you buy the policy. You know exactly what you will pay and exactly what the cash value will be at any future date.

UL is cheaper because it offers no such guarantees. The premium can rise, the cash value can fall, and the death benefit can shrink if you borrow from the account. In exchange, you pay less money upfront and have more flexibility to adjust the death benefit or stop paying premiums temporarily.

Whole life is the safer choice if you want predictability and do not want to worry about premium increases. UL is the better choice if you want lower starting costs and do not mind the risk that premiums might rise later, or if you want the flexibility to adjust the policy as your needs change.

Who should buy universal life insurance

UL makes sense for people who want permanent coverage but cannot afford whole life premiums, or who think they might need to access cash from the policy during their lifetime. It also works well if you expect your income to rise over time, so a premium increase in 10 or 15 years would not be a hardship.

UL is a poor fit if you need premiums to stay the same no matter what, if you are on a tight budget and cannot absorb a rate increase, or if you only need coverage for a specific period (in which case term is cheaper and simpler). It is also risky if you do not understand how the cash value works or if you plan to borrow from the policy frequently — each loan reduces the death benefit and increases the chance that premiums will rise.

Before buying UL, ask the insurance company for an illustration showing what happens if interest rates fall or the market declines. A good illustration will show you the worst-case scenario — what your premium would be if the cash value earns the minimum may provide rate. If that worst-case premium is more than you can afford, UL is not the right product for you.

Questions to ask before you buy

Ask the insurance agent or company for a detailed policy illustration that shows projected premiums, cash value, and death benefit over 10, 20, and 30 years. The illustration should include a "best case" scenario (if interest rates stay high) and a "worst case" scenario (if interest rates fall to the minimum may provide rate). Compare the worst-case premium to your budget.

Ask whether the policy has a secondary may provide — a promise that the death benefit will stay in force as long as you pay a certain premium, even if the cash value falls to zero. Secondary guarantees are common and valuable; they protect you from surprise premium increases if the cash value underperforms.

Ask what the minimum may provide interest rate is on the cash value. This is the lowest rate the company will credit to your account, no matter how low market rates fall. A higher minimum rate (2 to 3 percent) is better than a lower one (0.5 to 1 percent).

Frequently Asked Questions

Can my universal life premium go down if interest rates rise?

Rarely. If interest rates rise and your cash value earns more, the company may lower the cost of insurance slightly, but they almost never lower the premium you pay. Any savings go into the cash value account instead. Premiums go up, not down.

What happens if I stop paying premiums on a universal life policy?

The policy can stay in force by using the cash value to pay the cost of insurance each month. This works as long as the cash value is large enough. Once the cash value runs out, the policy lapses and coverage ends. You have no grace period like you do with other policies.

Is variable universal life safer than traditional universal life?

No — it is riskier. With variable UL, you choose how the cash value is invested, usually in stock or bond funds. If the market falls, your cash value falls, and your premiums may rise. Traditional UL is safer because the company invests the money and guarantees a minimum return, but returns are lower.

Can I convert my universal life policy to whole life later?

Some policies allow conversion, but not all. Ask your agent whether your specific policy has a conversion option and whether there are time limits or health requirements. Conversion is usually possible within the first 10 to 15 years.

Should I buy universal life if I have a family history of living past 90?

Maybe. If longevity runs in your family, permanent coverage makes more sense than term, because you are more likely to need coverage at age 80 or 85. But make sure you can afford the premiums at that age, or that the cash value will be large enough to keep the policy in force without your payments.