What Is Universal Life Insurance?

By Kelly Boyer Sagert · May 22, 2023 · 7 minute read

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What Is Universal Life Insurance?

Looking for a way to provide your loved ones with long-term financial protection? A universal life insurance policy might be worth considering.

This type of life insurance can provide coverage for as long as the policyholder is alive, and some policies also accrue cash value. Generally, when the policyholder dies, their beneficiaries receive a tax-free death benefit in the amount specified by the policy.

Below is a helpful look at universal life insurance, including a discussion of how it usually works and how it differs from other common kinds of life insurance.

Universal vs. Term Life Insurance

There are two main types of life insurance: permanent life and term life.

Universal life insurance, sometimes called adjustable life, is a kind of permanent life insurance. Policies last for a person’s entire lifetime and can be adjusted at any point if your circumstances or needs change. Typically, you can control such things as the amount of your death benefit, your premium amount, and where your cash value is invested.

Commonly, universal life insurance policies build cash value because the insurer invests a portion of your premiums over time. That money can be for a variety of purposes. You can borrow against it, use it to pay for premiums, withdraw up to a certain amount tax-free, or consider it a safety net.

Term life insurance works a bit differently. Policies provide coverage for a predetermined period of time, or “terms,” which often last between 10 and 30 years. If the policyholder dies within the term, their beneficiaries will receive the policy’s covered value, or “death benefit.” There is no payout if the policyholder dies after the term has expired. Monthly payments are often fixed, and there is no cash value.

By and large, term life insurance tends to be significantly less expensive than universal life insurance. This is due to several reasons, including the fact that term life coverage is temporary, and no cash value accrues during the policy’s term.

Pros of Universal Life Insurance

So, what are the advantages of a universal life insurance policy? For some people, the cash value component of a policy can be an appealing way to help build a nest egg and secure insurance coverage for beneficiaries.

Universal life also tends to be more flexible, allowing policyholders the option to use available funds or save them up for beneficiaries. Premiums can be paid out of the accumulated cash value when needed or desired, though note that doing so reduces the overall cash value of the policy.

Here’s another benefit: Because a universal life insurance policy is permanent, holders don’t need to worry about expiration dates or spend time finding a new policy after an old one expires.

Cons of Universal Life Insurance

Although universal life insurance has its benefits, there are some drawbacks. For instance, premiums are typically higher than term life and tend to increase based on the amount of the death benefit. Also, the returns your policy earns can be unpredictable. That’s because the interest rate varies on these policies, changing along with fluctuating market conditions. The gains of one year may not predict the potential earnings (or losses) of the next. Some policies have built-in floors and caps for the rate of return. For example, a policy invested in a given index might be guaranteed 0% to 12%. If the index posts a loss, the investment will stay the same. Conversely if the index goes up 20%, the insured would only gain 12%.

Here’s something else to consider: Although a universal life insurance policyholder can borrow against their policy’s cash value insurance, interest must be paid on what’s taken out. And when the amount of cash available in a given policy is tapped out, an insurance provider may decide to cancel the policy altogether.

In addition, if a payment is not made on time and the accrued cash value can no longer cover due payments, the policy may be terminated, and there is no payout. However, some companies offer customers a 30-day grace period for missed payments.

What Type of Policy Is Right For Me?

Life insurance policies, no matter the type, have a common goal: to provide loved ones with an added layer of financial security after the policyholder dies. Beneficiaries can use payouts to cover major expenses, such as housing, medical bills, educational costs, child care, and/or other financial needs. In some instances, beneficiaries may use payouts to pay unsettled estate taxes or bills.

When deciding what type of policy to purchase, shoppers might want to calculate how much money is needed to adequately protect their designated beneficiaries. That figure should account for things like your loved one’s needs, any outstanding debts you may have, and other financial responsibilities.

Other variables, such as age, marital status, number of dependents, and expected family income, may also affect which sort of life insurance policy a person may need or be eligible for.

To find out which life insurance policies or rates you may qualify for, request a quote from various insurance providers or agents, either by phone or through their website. You may be asked to provide additional information, such as your income, age, and health.

Recommended: How Much Is Life Insurance?

Should I Get a Life Insurance Agent?

There can be benefits to contacting an agent. Insurance agents are trained in the ins and outs of life insurance. They can explain the difference between term life insurance and whole life insurance policies and walk you through the extra riders (i.e., supplemental coverage) that can be added to standard plans and other fine print. If you’re new to buying life insurance, having that kind of information available can make the decision-making process easier.

When to Buy a Life Insurance Policy

When you decide to buy a life insurance policy depends on a number of factors, including your income and whether you have outstanding debt that your loved ones will end up having to pay after you die.

Generally speaking, the earlier you can purchase a policy, the better. That’s because life insurance is typically priced in part according to a person’s age and overall health. This means the younger and healthier you are when you buy a policy, the more affordable your monthly payments tend to be. Generally speaking, whatever rate you qualify for is locked in when the policy is issued.

What if you have a life insurance plan through their employer? In some cases, those policies offer less generous coverage than plans available on the market — at times, just one to two times the employee’s annual salary. While such policies can provide a quick influx of cash in the event you die, it’s often unlikely to be enough to provide ongoing financial support for those left behind. Plus, not all employer-sponsored life insurance policies are transferable, which means you could lose it if you quit.

If you need more consistent or robust coverage, it may make sense to explore a supplemental policy to more fully protect your family.

Recommended: 8 Popular Types of Life Insurance for Any Age

The Takeaway

Universal life insurance can provide long-term coverage as long as the policyholder is alive, and after they die, pays beneficiaries a set amount of money. This type of insurance is flexible — often, policyholders can control the premium and death benefit amount — and builds cash value over time. Term life insurance, on the other hand, provides coverage for a set amount of time, such as 10 or 20 years, and there’s no cash value attached to the policy. However, term life is usually less expensive than universal life. If you’re new to life insurance, consider enlisting the help of an agent to make sense of your options.

Ready to start shopping for life insurance? SoFi has partnered with Ladder to offer competitive life insurance policies that are quick to set up and easy to understand. You can apply in just minutes and get an instant decision. As your circumstances change, you can easily change or cancel your policy with no fees and no hassles.

Complete an application and get your quote in just minutes.

Coverage and pricing is subject to eligibility and underwriting criteria.
Ladder Insurance Services, LLC (CA license # OK22568; AR license # 3000140372) distributes term life insurance products issued by multiple insurers- for further details see ladderlife.com. All insurance products are governed by the terms set forth in the applicable insurance policy. Each insurer has financial responsibility for its own products.
Ladder, SoFi and SoFi Agency are separate, independent entities and are not responsible for the financial condition, business, or legal obligations of the other, Social Finance. Inc. (SoFi) and Social Finance Life Insurance Agency, LLC (SoFi Agency) do not issue, underwrite insurance or pay claims under Ladder Life™ policies. SoFi is compensated by Ladder for each issued term life policy.
SoFi Agency and its affiliates do not guarantee the services of any insurance company.
All services from Ladder Insurance Services, LLC are their own. Once you reach Ladder, SoFi is not involved and has no control over the products or services involved. The Ladder service is limited to documents and does not provide legal advice. Individual circumstances are unique and using documents provided is not a substitute for obtaining legal advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.


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