Laura Berry is a former State Farm insurance producer and insurance expert.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like Reviews.com.

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Reviewed by Daniel Walker
Licensed Car Insurance Agent

UPDATED: Jan 10, 2017

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Don't miss these facts...

  • Universal life insurance builds cash value that you can borrow against.
  • Universal life insurance is a type of permanent insurance that will offer you a lifetime amount of protection as long as you continue to make payments.
  • Universal life insurance offers two different types of death benefits.
  • Universal life insurance is more expensive than the other types of life insurance.
  • Universal life insurance will not yield a fortune in return, as the interest rates are fairly conservative.


Life insurance can be divided into two major categories: term and whole life. So where exactly does universal life insurance fit in?

Universal life insurance actually falls underneath a subcategory of whole life insurance. Find out what makes up a universal life insurance policy, and if it’s a good investment for you.

Learn more about universal life insurance below and make sure to enter your zip code in the quote comparison tool above for a free quote!

What is universal life insurance?

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Universal life can be somewhat complex to understand at first. Breaking it down part by part will help you comprehend the overall concept of what universal life insurance is all about.

Universal life insurance is a permanent type of insurance, meaning it will provide lifelong protection with no expiration as long as you continue to pay your premiums.

Although most people purchase life insurance to pay out a death benefit, universal life can provide much more than just a payout to your beneficiaries upon death.

Unlike a term policy, universal life insurance builds cash value over time. One of the key features of a universal policy is that you have the ability to tap into your cash value.

Once your cash value has accumulated, you will have the ability to borrow against it without any tax implications. However, if the loan is not repaid, the death benefit issued to beneficiaries may be reduced.

If the cash value is accessed as a withdrawal, then the policyholder may face tax liability.

Premiums are flexible in a universal life insurance policy. Depending on how much cash value you have, you are allowed to use the interest built up in your accumulated savings to help pay premiums over time.

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How does the death benefit work

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There are two options you have when deciding how you want the death benefit to be distributed to your beneficiary:

  • Type “A” Death Benefit
  • Type “B” Death Benefit

Under a type “A” benefit option, the death benefit will remain the same throughout the lifetime of the policy. As the cash value begins to accumulate, the amount of life insurance protection decreases.

For instance, if you have a $100,000 death benefit and have accumulated $15,000 in cash value, then the beneficiary will receive $100,000 total, composed of $85,000 in term insurance and $15,000 cash value.

In contrast, under a type “B” benefit option, the death benefit will increase according to the amount the cash value increases throughout the lifetime of the policy.

What are the key differences between whole life and universal life?

Since whole life and universal life are very similar, it is important to understand where their differences lie. A universal policy offers more flexibility than a whole life policy.

As a result, universal life policy premiums are often lower during a period of high-interest rates.

Another difference is how cash value accumulates.

Under a universal insurance policy, the insurance company sets a minimum interest rate.

This rate will be listed within the policy itself.

If the insurance company outperforms the minimum interest rate, the excess funds will be distributed to the cash value portion of the policy.

Is a universal life insurance policy a good choice for me?

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Not everybody is in the same boat, so it is difficult to say whether universal life insurance is right for you without analyzing your current situation. It may be a good choice if you want:

  • the flexibility in being able to adjust your payments and coverage amounts
  • to build cash value that you can borrow against
  • to have a permanent type of life insurance that will protect you for a lifetime

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What are the cons of universal life insurance?

Universal life insurance is usually more expensive than the other options when considering the premiums paid and fees incurred over the lifetime of the policy. In fact, universal life can be up to 4 times more expensive than term life insurance.

Be cautious when weighing your options. Universal life insurance has a couple options when it comes to mortality cost.

The first is Level Cost of Insurance (LCOI), which means the mortality portion of the premium will stay the same and never change. The second option is Yearly Renewable Term, which means that the mortality payment will fluctuate over time.

If you do borrow money from your accumulated cash value, it is important to know that you have to pay it back. You should also know that the insurance company will charge interest on the loan.

If you’re ready to make a big investment off of your cash value, it’s not going to happen. Although you will build cash over time, the interest rates are relatively conservative. You would be better off investing elsewhere if you’re looking for a big return.

What are my other options?

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If you only want to buy coverage for a certain period of time, consider term life insurance. Although this policy doesn’t build cash value, if you die within the term of the policy, your beneficiaries will receive the death benefit.

Term life insurance policies are usually sold in 20 or 30-year terms. The premium is level and will stay the same throughout the entire term.

It is also considerably less to purchase a term policy than opt for a whole life insurance policy.

If you surpass the term and end up having to purchase another term, the premium may go up quite a bit since a good portion of the premium is calculated on your current age.

Use strategy when choosing term insurance. Choose a term that coincides with the same timeframe where your family would benefit the most from it financially, especially if you are the sole provider.

Term life may be a good choice for you if:

  • You are trying to cover the years you are raising your children.
  • You are looking for something you can afford on a monthly basis.
  • If you can’t currently afford permanent life insurance, but plan to convert to a permanent policy later on when you can afford to do so.

It pays to shop around for insurance. By using online comparison tools, you can instantly get multiple life insurance quotes that will help you compare prices and determine the amount of coverage that’s right for you and your family.

Life insurance isn’t the easiest thing to think about. After all, who wants to plan for their own death?

As hard as it may be, your loved ones will thank you for thinking of them in advance. Life insurance can help your family use the proceeds to cover funeral costs, mortgage payments, college tuition as well as other expenses.

Make sure to enter your zip below to get your free life insurance quote today!