Infographic of umbrella and universal life insurance

What Is Universal Life Insurance [The 3 Main Types of Coverage]

There are two key components that make up every universal life insurance policy: the death benefit and the cash value. The death benefit is what your beneficiary receives when you pass away, and the cash value is the portion that earns interest. 

Depending on the terms of your policy, the cash value may be tied to a market index or a money market interest rate. As long as you pay your premium, you’ll have coverage for as long as you’re alive. For this reason, universal life is classified as a permanent type of life insurance.

Types of Universal Life Insurance

Universal life insurance comes in three varieties: guaranteed, variable and indexed. Each type of coverage differs in terms of cash value and investment options.

Guaranteed Universal Life

Guaranteed universal life insurance offers a guaranteed death benefit. The premium also stays the same monthly, making it easy to budget for your coverage. What makes guaranteed universal life different from other types of universal life insurance is that it typically has an end date. When you sign up for this type of coverage, you may decide to end it when you turn 90, 95, 100 or even older. Guaranteed universal life policies also build little cash value compared to the other universal life options.

Variable Universal Life

Variable universal life gives you more options when investing your policy’s cash value. For example, you may be able to invest in multiple accounts or choose to invest in mutual funds, bonds or stocks. This gives you extra flexibility in managing your investment.

Indexed Universal Life

When you purchase an indexed universal life policy, its cash value is tied to an index fund. The better the fund performs, the greater your return on investment. Some insurers also give policyholders the option of earning some of their cash value in fixed-rate accounts.

Advantages and Disadvantages of Universal Life Insurance

Infographic of universal life insurance

Universal life insurance has several advantages for policyholders, but you also need to be aware of some potential drawbacks that may affect your insurance-related decisions. The advantages and disadvantages of this type of life insurance are summarized below.


  • Immediate protection: The death benefit becomes active on your policy’s effective date, giving you extra peace of mind.
  • Tax advantages: Your beneficiary won’t have to pay income tax on the proceeds of the death benefit. You also build cash value on a tax-deferred basis, meaning you won’t have to pay taxes on the current earnings or interest.
  • Cash value: You are able to take out a loan against the policy’s cash value or use the cash value to supplement your income during retirement. You can also use the cash value to pay your monthly premiums if desired.
  • Flexibility: With a universal policy, you can increase or decrease your payments based on changes in your financial circumstances. This makes it easier to fit life insurance coverage into your budget, even if you change jobs or have unexpected medical expenses.


The ability to access the cash value of your policy is a significant advantage of universal life insurance. Still, you need to know that doing so can affect the amount of money left to your beneficiary when you pass away. 

In some cases, accessing the remaining cash value of a universal life policy may cause the policy to lapse, leaving your loved ones without financial protection in the event of your death. In addition, if you choose to lower your premiums, your policy will likely build cash value at a much slower rate.

How Universal Life Insurance Works

Depending on the terms of your policy, you may pay a monthly premium or a lump sum when you first purchase universal life insurance. This is what allows a universal life policy to build cash value over time. If you don’t access your policy’s cash value, it will continue to grow, although the balance may go down if your investments don’t perform as well as expected. You won’t pay any tax on the growth if you don’t withdraw any money from the cash value.

Once you start accessing your policy’s cash value, you’ll have to pay tax on the amount of money you withdraw. The death benefit may also decrease with each withdrawal you make. If you choose to take out a loan against the policy’s cash value, you won’t have to pay any tax on it if you repay the loan in full while you’re still alive. It’s essential to pay close attention to how much your policy is worth and how much money you’ve withdrawn, as withdrawing too much money can cause your policy to lapse.

When you die, your beneficiary receives the death benefit, but the insurance company keeps the remainder of the cash value. Depending on how the policy is set up, your beneficiary may receive monthly payments or a single lump sum.

Universal Life Insurance vs. Other Types of Life Insurance

  • Universal vs. whole life: Both types of life insurance can be used as an investment. Whole-life policies guarantee cash value accrual, but universal life offers more flexibility regarding death benefits, premium amounts and coverage amounts. If you have universal life, your premiums may increase, and the cash value of your account can decline if your investments don’t perform well.
  • Universal vs. term life: Term life doesn’t build cash value, so it can’t be used as an investment vehicle. Universal life is also more flexible than term life. One advantage of term life insurance over universal life insurance is that term premiums tend to be lower.

Is Universal Life Insurance Right for You?

Universal life insurance is best for people with liquid assets who can afford to pay the premiums on an insurance policy that builds cash value. If you just want some financial protection for your beneficiaries, then term life can give you that protection at a lower cost. In some cases, purchasing both types of coverage at different stages of life makes sense. 

For example, a younger person might want an inexpensive term life policy to ensure their family members receive a death benefit if they pass away earlier than expected. When that person is older and on firmer financial footing, they can purchase a universal life policy and build cash value.

How Much Coverage Do I Need?

It really depends on your financial situation. A single person without dependents probably doesn’t need a large policy. However, you’ll need more coverage if you have a spouse or child who relies on your income to pay for their housing and other living expenses. 

You also need to consider your investment strategy and determine how much cash value you want to build before buying universal life coverage. If you have no other investment accounts, you may wish to purchase a sizable universal life policy to maximize your returns.

You might also be interested in: Life Insurance Explained

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