Universal life insurance lasts forever and can help build wealth, but it's more expensive than term

Universal life insurance lasts forever and can help build wealth, but it's more expensive than term

February 15, 2021
  • Universal life insurance is a type of permanent life insurance that never expires.
  • In addition to a death benefit, there’s a cash value component that you can use during your lifetime.
  • Universal life gives you the flexibility to increase or decrease your death benefit.
  • Policygenius can help you compare life insurance policies to find the right coverage for you, at the right price »

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

Term life insurance only lasts for a specific time frame. Permanent life insurance never expires and has a cash value component in addition to the death benefit. You can take a loan on the cash value or use it as collateral during your lifetime. This is why permanent life insurance is considerably more expensive than term life insurance.

Although the term “whole life insurance” is often used synonymously with permanent life insurance, whole life, universal life, and variable life are actually types of permanent life insurance. Other permanent life insurance policies are a variation of these three products.

Quick tip: All permanent life insurance policies have a death benefit in addition to cash value. The difference is how the cash value is managed: insurance company portfolio, stocks, or options.

What is universal life insurance?

Universal life is a type of permanent life insurance. Permanent life insurance lasts until you die, or an average of 110 years, which is why it’s more expensive in the early years of the policy. The older you get it, the less expensive it becomes, according to Mark Williams, CEO of Brokers International.

Universal life insurance was created in the 1980s when interest rates were high. Like whole life, universal life’s cash value is invested in the insurance company’s portfolio. 

Unlike whole life insurance, universal life’s cash value earns interest based on current money market rates, but interest rates fluctuate with the market. Because it’s based on interest rates, there will be varying returns and costs. Allstate has a helpful universal life policy return calculator.

Universal life insurance gives you the flexibility to increase or decrease your death benefit. If you lose your job, you can call the insurance company to decrease your death benefit so your payment can go down. It also gives you the ability to change your death benefit if your circumstances change. 

There are different types of permanent life insurance, but they all have death benefits as well as a cash value that grows on a tax-deferred basis. The big difference between the types of permanent life insurance policies is how they manage the cash value.

Types of permanent life insuranceBest forWhere is money invested?
Whole lifeGuaranteeing same premium for the life of the policyInsurance company’s portfolio
Universal lifeFlexibility to change premium, death benefit, and cash value over timeInsurance company’s portfolio
Guaranteed universalFlexibility of a universal life policy with guaranteed rates of whole lifeInsurance company’s portfolio
Indexed universalLike universal life, but with interest rates in fixed indexed marketFixed index stocks and options
Variable lifeInvesting cash value in the stock market rather than your insurance companyStock market
Variable universal lifeFlexibility to change death benefit, investing in the stock market rather than your insurance companyStock market

You can add riders to your universal life insurance policy

All types of permanent life insurance, including universal life, offer riders that can be added to the policy. This can’t be done with term life insurance policies.

Riders include:

  • Waiver of premium: Allows you to pause your premium payments if you are sick, hurt, or disabled
  • Long-term care: Lets you use the policy’s death benefit toward assisted living during your lifetime (such as in-home care or a nursing facility)
  • Family rider: Puts the entire family under one policy

Every rider is an additional cost that increases the premium on your policy, but it’s better than having multiple policies. Williams noted that riders vary depending on the insurance company, and that you must buy riders up front. 

How to use life insurance cash value

You can use the cash value of a permanent life insurance policy during your lifetime, for things such as paying your children’s college tuition, funding a business, or purchasing a second home. Most people use the cash value to fund their retirement — paying themselves a monthly income when they stop working. Due to these features, permanent life insurance can function as an investment and wealth-building tool.

If you decide you don’t want your permanent life insurance policy anymore, you get the cash value back. However, Williams warned that because the money inside the policy has been growing on a tax-deferred basis, you will pay taxes on it.

If you cash the policy in, Williams continued, there’s no more death benefit; you are literally canceling policy. This is also known as cash value surrender — giving up a permanent life insurance policy that has cash value.

How much does universal life insurance cost?

Permanent life insurance is considerably more expensive than term life insurance because of the cash value aspect of this kind of policy, and because the policy never expires. 

Below are price ranges for a universal life insurance policy worth $250,000 for a healthy nonsmoker.

Age$250,000 Universal life monthly insurance premium
25-35 female$54-$83
25-35 male$63-$103
35-45 female$83-$130
35-45 male$103-$150
45-55 female$130-$207
45-55 male$150-$244
55-65 female$207-$337
55-65 male$244-$427

Data from SmartAsset

Quick Tip: Before purchasing a life insurance policy, speak with a financial advisor — and your accountant — to make sure it’s providing the benefits and coverage you need.

Who needs universal life insurance?

High-net-worth individuals — those with at least $1 million in liquid assets — often have permanent life insurance policies for tax benefits, endowments, and gifts. The cost is considerably more than term life insurance because permanent life insurance is also a wealth-building tool. 

The average person may not be able to afford a $1 million universal life insurance policy. Think of permanent life insurance coverage like equity in a home. You may not be able to get your dream home right off the bat, but you can get a starter home that also builds you wealth. With permanent life insurance, start with a smaller death benefit and increase it over time. And if you can’t afford a permanent life insurance policy, get a term life policy that can be converted to a permanent policy.

Williams also suggests a combination of permanent and term life insurance. For example, if you have $200,000 in permanent life and $300,000 in term for 20 years, at the end of 20 years the term life insurance policy goes away but you still have your $200,000 permanent policy that has earned cash value.

If you’re considering universal life insurance, it’s wise to consult an accountant and financial advisor to determine which policy is best for you and advise you of the tax benefits and implications. It’s worth taking the time to find the best policy for you, because once you’ve signed on the dotted line, it’s a lot more difficult to make changes if you need to adjust your coverage.

Ronda Lee is an associate editor for insurance at Personal Finance Insider covering life, auto, homeowners, and renters insurance for consumers. She is also a licensed attorney who practiced litigation and insurance defense.

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