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Guide to Universal Life Insurance: Benefits, Drawbacks and Costs


Just as investments can be an integral part of your financial plan, so too can life insurance. Universal life insurance, in particular, offers a unique blend of insurance coverage and investment opportunities. However, before determining if it’s the right fit for you, you should understand the benefits, drawbacks and costs of universal life insurance. To get a better sense of whether this type of insurance is appropriate for you, also consider speaking with a financial advisor.

What Is Universal Life Insurance, and How Does It Work?

Universal life insurance is a type of permanent life insurance that offers both a death benefit and a cash value component – the latter of which can grow over time. Unlike term life insurance, which covers a specific period, universal life insurance provides lifelong coverage, as long as premiums are paid.

Here’s a closer look at the different components of a universal life insurance policy:

Premiums and Cash Value

Universal life insurance premiums cover two different components: the cost of insurance and the cash value of the policy. The latter acts as a savings or investment account, growing over time according to an interest rate set by the insurer or market returns. While premiums will increase as you get older, you can use the cash value to pay for those rising costs. Just keep in mind that any remaining cash value is typically forfeited when you die.

Death Benefit

Universal life insurance policies include a death benefit – a payment the insurance company makes to your beneficiaries when you die. This benefit is separate from the cash value and can be adjusted over time, depending on your needs. For example, the insurance company may allow you to increase the size of your death benefit pending a medical exam.

Policy Loans and Withdrawals

Universal life insurance allows you to take out loans or withdrawals from your policy’s cash value. However, any unpaid loans or withdrawals can reduce the death benefit that your beneficiaries will eventually receive.

Universal Life Insurance Policy Riders

Having a universal life insurance policy without any riders is like having a plain, basic car. Policy riders are additional benefits or features that you can add to your universal life insurance policy, much like upgrading your basic car with leather seats or a sunroof. Most insurers offer options like accelerated death benefits, premium waiver riders or accidental death benefit riders that you can add to your universal life insurance policy at an extra cost.

Types of Universal Life Insurance

Universal life insurance comes in several forms, each offering unique features and benefits. Considering the complexity of this product and the types of policies, it’s crucial to consult with a financial advisor before deciding on a particular policy.

  • Guaranteed universal life. This form of universal life insurance provides a guaranteed death benefit as long as premiums are paid on time.
  • Indexed universal life. The cash value component of an indexed universal life policy is linked to a stock market index, thus creating a potentially higher return. However, it comes with a high risk, as the cash value may decrease if the index performs poorly.
  • Variable universal life. These policies allow the insured to invest the cash value component in a variety of securities like stocks, bonds and mutual funds. This choice can potentially provide higher returns, but it also carries an increased risk.

Understanding the Cost of Universal Life Insurance

The cost of universal life insurance can vary widely due to factors like age, the health status of the policyholder, as well as the type and amount of coverage that’s needed. Therefore, the costs can be personalized and have the potential to differ significantly.

According to PolicyGenius, a healthy 35-year-old woman would pay approximately $117 per month for $250,000 worth of guaranteed universal life coverage from Pacific Life in July 2023. Meanwhile, a 55-year-old man would pay considerably more – $331 per month – for the same level of coverage. Similarly, a policyholder with a risky occupation or hobbies may also attract higher premiums.

Benefits of Universal Life Insurance

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Universal life insurance offers several key benefits, making it a potentially attractive option for those seeking a life insurance product.

The main pros include flexibility, cash value growth, adjustable death benefits and other tax benefits.

  • Flexibility. Universal life insurance offers flexibility, allowing you to adjust your premium and death benefit amounts as your needs change. Moreover, universal life also provides access to accumulated cash value during the policyholder’s lifetime.
  • Cash value growth. One of the benefits of universal life insurance is the potential for cash value growth. Consider this: if you deposit $1,000 into the account portion of a universal life policy offering a 5% annual interest, over 20 years, your initial investment could potentially increase to $2,653.30 (1000 * (1.05^20)).
  • Adjustable death benefit. With universal life insurance, you have the option to adjust the death benefit to match your fluctuating financial needs, enabling you to increase or decrease your coverage as required.
  • Tax benefits. With universal life insurance, cash value growth is tax-deferred, implying that you aren’t obligated to pay taxes on the gains while they accumulate. In addition, death benefits are typically subject to income taxes.

Drawbacks of Universal Life Insurance

Despite its benefits, universal life insurance has potential drawbacks. Here, we aim to elaborate on the risks and provide possible solutions to maintain a balanced perspective.

  • Cost: Universal life insurance can be pricier than term life insurance policies.
  • Complexity: Universal life insurance is more complex than term life policies, as it involves investment risk and may require rigorous management to ensure the cash value grows as expected.
  • Risk of lapse: There is a lapse risk if the cash value component performs poorly or if you withdraw too much money, which could lead to losing coverage.

Universal Life Insurance vs. Whole Life Insurance

Universal life and whole life insurance both offer lifelong coverage and a cash value component, but notable differences exist. Whole life insurance offers fixed premiums and guaranteed cash value growth, whereas universal life insurance provides flexible premiums, adjustable death benefits and a cash value component that may be linked to market performance.

Whole life insurance can also be significantly more costly than universal life. According to PolicyGenius, a $500,000 whole life policy from MassMutual in February 2023 would cost a 35-year-old man $571 per month, while the same amount of coverage with a guaranteed universal life policy would only cost $198 per month.

How to Choose the Best Universal Life Insurance Company

A married couple discusses universal life insurance with their financial advisor.

Selecting the right universal life insurance company is vital for securing the best coverage for your needs. Here’s what to consider as you research insurance companies and select a policy:

  • Financial strength and ratings. Opt for a company with solid financial ratings from agencies like A.M. Best, S&P or Moody’s, which are indicative of the insurer’s ability to pay out claims.
  • Customer service. A responsive, helpful and unchallenging company with excellent customer service should be your priority.
  • Policy options and riders. The best companies extend a range of policy options and riders, enabling you to customize your coverage.
  • Cost. Finally, compare the costs of policies for different companies. While cost shouldn’t be your only influencing factor, it is important to select a policy in line with your budget.

Bottom Line

Universal life insurance can serve as a potent financial instrument, offering both lifelong coverage and a potential savings source. But it’s not appropriate for everyone. Fully comprehending the benefits, drawbacks and costs before deciding if it’s suitable for you is paramount.

Life Insurance Tips

  • Buying life insurance can help secure your family’s financial future and a financial advisor can help you make this important purchase. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Knowing how much coverage you need is a critical component of the financial planning process. SmartAsset has a tool specifically designed to help you determine how much life insurance coverage you should buy based on your income, your marital status, your dependents and other factors.

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