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Insurance

What is universal life insurance?

Universal life insurance can help you build cash value and adjust your premiums.

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Tony Anderson | Getty Images

Universal life insurance is permanent life insurance coverage that stays in place your entire life (or as long as you pay premiums). When you die, your beneficiaries, or those you've chosen to receive the funds from your policy, will receive a death benefit.

Whether or not universal life insurance is the right fit for you will depend on if the additional benefits of this type of policy outweigh the expenses. Here's what you should know about universal life insurance before you buy a life insurance policy.

What is a universal life insurance policy?

A universal life insurance policy functions quite differently from other major types of life insurance. It offers much more flexibility than whole life insurance while also staying in place for your entire life (unlike term life insurance which expires after a certain number of years).

Universal life insurance allows you to build cash value in the policy, which you can borrow against for a loan or use to pay premiums. It also gives you the option to increase the death benefit later in life.

Many insurers offer universal life insurance, including several of our top picks for the best life insurance. Northwestern Mutual, our top pick overall, offers top ratings for customer satisfaction and high ratings for financial stability. Pacific Life earned our top pick for universal life insurance, offering individualized policies to tailor coverage to your needs.

Northwestern Mutual Life Insurance

  • Cost

    The best way to estimate your costs is to request a quote

  • App available

    Yes

  • Policy highlights

    As the largest life insurer by market share in the U.S., Northwestern Mutual is an established choice with a proven record. And, it offers a number of types of policies across the country. 

Pacific Life Life Insurance

  • Cost

    The best way to estimate your costs is to request a quote

  • App available

    No

  • Policy highlights

    Pacific Life offers permanent life insurance policies in addition to term insurance. A number of riders make it possible to customize the policy to fit your needs.

Pros

  • Offers specialized products that tailor the coverage to your needs

Cons

  • Must be purchased through an advisor
  • No online quotes available

How does universal life insurance work?

As you pay your premiums, money called cash value can accumulate in the policy. It's generally built with a portion of your premium. This cash value grows over time, and depending on the type of universal life insurance you have, it can be invested either by you or the insurance company.

Cash value can be used over the life of the policy: it can be used to pay premiums, take out a loan against the policy, or even supplement retirement income.

When you die, your beneficiaries receive a death benefit, a set amount that you determined. It's worth noting that with most policies they won't receive any of the cash value. However, the death benefit paid out is generally sheltered from the income tax.

What types of universal life insurance are there?

There are a few different variations of universal life insurance that differ based on the types of investments inside the policy. Here are the three types you'll see while shopping for universal life insurance:

  • Indexed universal life insurance: This type of coverage has investments tied to a stock market index such as the S&P 500. Usually, these investments will have limits on your gains and losses so it doesn't follow the index exactly.
  • Variable universal life insurance: This coverage allows you to manage sub-accounts where money is invested in stocks and bonds. If the value of your investments decreases, you could lose cash value in the policy.
  • Guaranteed universal life insurance: With this coverage, death benefits and premiums won't change, and you won't earn as much cash value. You'll select an age when the policy ends (generally over age 90). While it's one of the cheaper forms of universal life insurance, it could lapse if you miss even one payment.

The type of life insurance that's right for you will depend on your budget, how much you want to manage your investments and your coverage needs.

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What are the pros and cons of universal life insurance?

The exact pros and cons of universal life insurance will vary based on the type of coverage you choose. But generally, there are a few things that people looking to buy universal life insurance should keep in mind as they shop for coverage.

Pros

  • Coverage is generally lifelong, and won't expire like a term policy.
  • Has a cash value component that can help you pay for coverage, or borrow against in the future.
  • Premiums are flexible, so you can adjust as your income lowers in retirement.
  • Death benefits are flexible, so the amount can be adjusted as your needs change.
  • Cash value grows tax-deferred, so taxes aren't owed on earnings or interest, and death benefits are generally tax-free.

Cons

  • Has more expensive premiums than term life insurance.
  • Building cash value is not guaranteed the way it would be with whole life insurance.
  • Fees can be high, specifically for variable universal life insurance.
  • Policies can be complicated — you may need to invest the money you put into the policy, specifically with variable universal life insurance.

Bottom line

Universal life insurance offers flexible premiums and death benefits, along with cash value that can be used for a variety of purposes. Assess your financial needs and how insurance fits into your plan to determine if universal life insurance is right for you.

Correction: There are some policies that allow beneficiaries to receive cash value from universal life insurance policies when the policyholder dies. An earlier version did not note this possibility.

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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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