How Does Universal Life Insurance Work?



Life insurance coverage types are set up to ultimately provide a death benefit amount at the time of your passing; however, many policy types have additional benefits that grow along with your life insurance investment.

Whereas whole life insurance focuses primarily on building towards the death benefit amount, universal life insurance premiums accrue interest based on the current market's interest rates. Interest returns are then added to the cash value of your policy. Of course, a portion of your premium payment pays for the cost of the insurance coverage (COI) and fees charged by your insurance company.


Where whole life insurance offers a fixed and stable financial base, universal life coverage provides flexibility at a lower cost. As such, universal life insurance is considered the happy-medium option between whole and term life coverage.

Flexibility options include- Withdrawals can be made from the policy's cash value with no penalty fees applied.

Premium payment schedules can be adjusted at any time.

Additional premiums can be applied towards the policy at any time.

The death benefit amount can be changed.

You can surrender the policy and recoup its accumulated cash value after the first 15 years without paying a huge surrender fee.

Risks of

The one key variable you'll want to pay attention to with universal life coverage is the market interest rates within any given fiscal quarter. If interest rates are high, the cash value of the policy will grow accordingly. However, a low interest bearing market will diminish the cash value of your policy as company fees and insurance coverage costs (COI) are applied.

Making additional premium payments towards your policy when interest rates are low will protect the policy's cash value. Otherwise, you run the risk of losing the bulk of your cash value, if not all of it.

Variable Universal Life Insurance

Another coverage option available under the universal umbrella is variable universal life coverage. Variable universal life differs in cost and function. Premiums for variable universal life are more expensive, however the investment growth potential is there.

When you make a premium payment on a variable universal life insurance policy, a portion of that payment will cover the cost of the policy. The remainder of the premium payment will go into mini-accounts, all of which will be invested in whatever stocks, bonds, or money-market funds you choose.

These mini-investment accounts will need to be monitored and attended to just like you would for any other stock market investments. This is the portion of your policy premium that will determine how large your death benefit will be, as well as what the actual cash value of the policy is.