An In-Depth Look at Universal Life Insurance

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Key Takeaways

  • In the world of life insurance, the Goldilocks of policies may be Universal Life insurance. The available forms of life insurance range from term contracts to whole life policies. In the middle, we have Universal Life (UL) insurance, more formally known as Flexible Premium Adjustable Life.

In the world of life insurance, the Goldilocks of policies may be Universal Life insurance (UL).

The available forms of life insurance range from term contracts to whole life policies. In the middle, we have UL insurance, more formally known as Flexible Premium Adjustable Life. (Also read: What is universal life insurance?)

Developed in the 1970s and added to most insurers’ portfolio of products a decade later, UL insurance bridged the gap between inexpensive short-term life insurance with the high-priced guarantees of Whole Life.

There are the advocates of Universal Life policies as well as the detractors. In the end, what is most important is making sure that any financial product you purchase meets your financial objectives.

And the first step is by becoming educated about the products available to you.

Why Should I Purchase Life Insurance?

There are many reasons to purchase life insurance. The reasons as to why a life insurance policy is needed in the first place will help determine which life insurance product may be your best fit.

Practical uses for life insurance death benefits include:

  • Debt coverage
  • Final expenses
  • College funding
  • Charitable giving
  • Mortgage coverage
  • Income replacement
  • Unpaid medical bills

Term insurance is commonly used to cover short-term obligations such as mortgage payments and college funding. On the other hand, Whole Life insurance has traditionally been used to provide coverage well into retirement to replace income or fulfill charitable giving goals.

While term insurance can be exceptionally inexpensive, their renewability after 10, 20, or 30 years may not be guaranteed.

Whole Life, however, can be unaffordable and less attractive when the long-term financial goals may become funded by other means. (Also read: How is term life insurance different than whole life insurance?)

Enter Universal Life insurance.

Flexible Funding

If it is determined a long-term life insurance solution is required, a UL insurance policy may be a viable option. UL insurance effectively combines term insurance with an investment component and provides flexibility in your premium payments.

Imagine an empty well with a bucket hanging by a rope. Each year your premium dollars are deposited into the well. And each year the actuarial amount to pay for the life insurance cost is pulled out of the well along with administrative costs.

When the premium you have paid in equals the insurance and administrative costs, the policy will continue for another year. But when a premium higher than the costs is deposited, the well begins to fill up with cash value. The cash value may earn interest, dividends, or investment returns, depending on your investment choices.

To ensure a UL insurance policy continues through your lifetime, it is dependent upon filling the well. If you make lower payments, or if the cost of insurance exceeds your premium payment, then the policy will tap into the cash value to pay the shortfall.

Should there not be enough premium and cash value to pay the insurance and administrative costs, the policy will lapse.

Transparent Transactions

There are two long-term life insurance options available, Whole and UL. With Whole Life, you are presented with a fixed and guaranteed premium. However, whole life premiums do not reveal how or where your premium dollars go.

One of the desirable features of Universal Life insurance is the transparent nature of your premium payments. For every premium dollar paid, you get to see exactly where each penny goes. Premiums are divided between the following:

  • Investment pool
  • Cost of insurance
  • Administrative costs

As the years carry on, you will be able to see the cost of insurance increase with your age. Administrative costs commonly state relatively flat, while investment dollars will fluctuate based on the performance of the policy.

This provides you and your insurance agent to custom design a life insurance policy to exactly meet your needs.

Living Benefits

Purchasing life insurance for most individuals is about protecting the lifestyle you’ve created for your loved ones if the unthinkable occurs. But the odds are high you will live well into retirement age.

Fortunately, UL insurance policies provide benefits while you are alive, further bolstering the attractiveness of Universal Life policies.

There are three primary living benefits for UL policyholders:


Premiums paid into a Universal Life policy may be withdrawn tax-free. It is important to note withdrawals will impact the longevity of the policy, and any gains would be taxable.


If cash is required with the intentions of paying the sum back, a loan may be taken out against the policy. Interest rates are usually low and are paid back into your cash value. Effectively you are paying yourself interested instead of a bank.


Permanent life insurance policies such as Universal and Whole Life may have collateral assignments placed on them to secure specifically designated beneficiaries.

Final Thoughts

With all the benefits Universal Life insurance provides, the decision to purchase a policy should not be taken lightly.

To learn more about your life insurance options, contact the experts at Our licensed insurance experts will be happy to answer any questions you have.

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