Universal Life Insurance Guide

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Contributor, Benzinga
December 10, 2021

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There are multiple types of life insurance — and each type of insurance comes with advantages and disadvantages. Universal life insurance policies can provide you with a way to invest and accumulate cash value on your policy while also enjoying flexibility with your premium payments. Learn more here and compare quotes.

What is Universal Life Insurance?

The 2 main types of life insurance policies are permanent life insurance and term life insurance. Universal life insurance is a type of permanent life insurance. This means the policy will cover you for the entirety of your life, so long as you continue to pay the premiums. 

Universal life insurance is the cheaper, more flexible option when compared to whole life insurance, which is another type of permanent life insurance. However, the premiums, death benefit and cash value are all subject to change with a universal policy. The death benefit can be adjusted to fit your needs, whether this is an increase or decrease in funds.

How Does Universal Life Insurance Work?

Universal life insurance allows policyholders to change their premiums and death benefits, as long as the change is within the policy’s limits. The policyholder is able to decide the amount of payment and when they want to pay it. In addition to the death benefit, universal life policies build a cash value, which grows tax-free over time. 

There are 3 types of universal life insurance you can choose from: guaranteed universal life, indexed universal life and variable universal life. The different types of policies can provide you with a more tailored policy, depending on what you need and want. 

Guaranteed Universal Life Insurance

Guaranteed universal life insurance is the cheapest policy because of the minimal cash value. You choose the age at which your policy will end. If you need to, you can lower your premium amount, which will decrease your death benefit. Nevertheless, there is a guaranteed death benefit upon your death, which is paid out to your beneficiaries.

Indexed Universal Life Insurance

Similarly, indexed universal life allows for changes to the death benefit and premiums if your needs or budget change. This type of policy offers the option to divide the cash value among fixed accounts or equity index accounts. The latter implies that the cash value component will be tied to a stock market index, such as NASDAQ-100 or S&P 500. However, the funds are usually not directly invested in the stock market — though this detail depends on the insurer. Regardless, the premiums for this policy are lower because of the higher risk that comes with fluctuating markets. 

Variable Life Insurance

Variable universal life allows varied premiums and death benefit amounts. You can select sub-accounts for your cash-value investments, which you will need to steadily maintain. These policies usually have higher fees, and there is still a chance that your investments can  diminish greatly. 

Universal Whole Life Add-Ons and Riders

Universal life insurance policies also come with the option to add riders, which are provisions that add customization to your policy and needs. Riders can include provisions to deduct from the death benefit for long-term care expenses, extended coverage to your spouse or the ability to use your death benefit while you are still alive in the case of a critical illness.       

Universal Life Insurance Quotes

Are you thinking about investing in a universal life insurance policy? Consider starting your search with Policygenius below.  

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Overfunding Universal Life

In order to keep your insurance policy active, you must pay a monthly premium. Your premium is the minimum amount that must be paid in order to keep your policy from lapsing.

Though you cannot pay less than your premium each month if you want to keep your policy active, you can pay more into your policy beyond your premium. This is referred to as overfunding. Overfunding is great in case you plan to access your cash value later in life. It can also result in the cash value being used to pay the policy’s premiums in the future.  

The cash value accumulates tax-free and can be accessed without causing any issues with your policy’s death benefit. Though the IRS does not set an annual limitation on the dollar amount you can overfund a universal life insurance policy, certain types of policies can have different regulations when it comes to overfunding. You’ll want to speak with a tax or finance professional to be sure you’re overfunding your policy in a way that’s most advantageous to you according to your income. 

Withdrawing from Universal Life

There are several ways to withdraw funds from a universal life insurance policy. Withdrawing directly from the cash value of your policy is the easiest and most direct way to use the money that accumulates in your policy. Withdrawals from the cash value of your policy are tax-free so  long as the amount withdrawn does not exceed the amount funded by your premiums. You can think of withdrawing money from your cash benefit in the same way as you think about making a deduction from your bank account. You always have liquid cash at your disposal, but when you withdraw money, you reduce the total cash value of your account (your death benefit). 

You can also borrow money against your policy. This is generally a good option if you are having trouble getting a loan in a more traditional way, like from a bank. However, if you die before you finish paying back your loan, anything you owe will be deducted from your remaining death benefit before the money reaches your beneficiaries. 

If you need a large lump sum of money to cover a major expense quickly, you also can cancel your insurance coverage. You can easily call your insurer and cancel your policy, which will result in you receiving the surrender value in cash. Your surrender value is usually the current cash value of your policy. Keep in mind that  a surrender fee usually is taken from the cash value before you receive a payout. Obviously, surrendering your policy also means that no death benefit will be paid out to your beneficiaries when you die.

Another important note: The money you receive by surrendering a universal life insurance policy is subject to income tax. If you already have taken a loan out against the value of your policy, your insurance provider will deduct your outstanding loan balance from any payout you receive. When combined with surrender fees, this can leave you with significantly less money.

Who Benefits from This Type of Coverage?

Everyone can benefit from a universal life insurance policy. Not only will it benefit you, it will also benefit your family after you’re gone. Your beneficiaries will receive the death benefit when you die, and you can access the cash value of your policy while you’re alive. The ability to change the payment amount is especially beneficial for those whose income might vary year to year, or even month to month. Those who own a business or are sales-related professionals benefit from this the most.   

A universal life insurance policy is great for those with changing financial needs alongside the different stages in life. You can use the policy to save for a major expense, such as a child’s college tuition or early retirement. You can also use the policy as an income replacement or as a way to pay for any final expenses, including funeral and burial costs.   

This type of policy also can protect your family’s financial security by allowing you and your beneficiaries to flexibly build assets, deal with uncertainties in life and create generational wealth. Your beneficiaries also won’t need to worry about paying taxes on their death benefit, meaning that this money can be put directly toward a major expense. You can purchase a universal life insurance policy at any time, and this type of policy affords you more flexibility to tackle life’s changing challenges as you age. 

Investing Through Life Insurance

Not everyone had the luxury of beginning their retirement savings in their 20s. If you got started saving for retirement later in life, a universal life insurance policy can provide you with both an investment opportunity and a safeguard for your beneficiaries. To learn more about the many types of life insurance, we recommend checking out our article on the best term life insurance policies and current whole life insurance rates.    

Frequently Asked Questions


What are the disadvantages of universal life insurance?


Though universal life insurance policies usually have lower premiums when compared to whole life insurance policies, death benefits may be significantly lower. Additionally, any money you borrow or withdraw from your policy is deducted from your death benefit. 


Should I cash out my universal life insurance?


If you don’t use the cash value of your life insurance policy, it is reabsorbed to the insurance provider. Your beneficiaries typically do not receive both the death benefit and your policy’s accumulated cash value. This makes it beneficial to use your cash value and take loans and deductions as you need them while you’re still alive. 


Benzinga crafted a specific methodology to rank life insurance. To see a comprehensive breakdown of our methodology, please visit our Life Insurance Methodology page.

About Sarah Horvath

Sarah is an expert in the insurance, investing for retirement and cryptocurrency space.