Universal Life Insurance
Plain English
Universal life is permanent life insurance with flexible payments. Its cash value earns interest, and once enough has built up, you may be able to pay less or skip premiums for a while. The catch: if the cash value runs out, the policy can lapse and your coverage ends, so the flexibility needs watching.
Read to the end to complete this term.
On this page
Definition
Universal life insurance is a type of permanent life insurance with a cash value account that generally earns a money market rate of interest. Once enough cash value has built up, the policyholder may be able to change the premium payments, and may be able to increase the death benefit after passing a medical exam.
Why It Matters
Universal life is often sold for its flexibility, but that same flexibility is where people lose coverage. Lower interest than expected, or premiums cut for too long, can drain the cash value until it no longer pays the policy's monthly charges. Knowing this helps you read the yearly statement and ask the right questions before paying less.
Real-World Example
Imagine someone buys a universal life policy and pays the planned premium for ten years, building cash value. Money gets tight, so they stop paying, and the policy's monthly charges are taken from the cash value instead. Four years later the cash value is nearly gone, and the insurer sends a notice that the policy will lapse unless they pay more. Checking the annual statement each year would have shown this coming.
Personal vs. Commercial
For individuals: If you have a universal life policy, read the annual statement for the cash value and the policy charges. Ask the insurer for an "in-force illustration" showing how long coverage lasts at your current payments.
Common Misconceptions
- Flexible premiums mean you can stop paying with no consequences. If the cash value can't cover the charges, the policy can lapse.
- Universal life works like an investment account. Its cash value generally earns a money market rate of interest; investment choices are a feature of variable life.
- The death benefit can be raised at any time. Increasing it may require a medical exam.
Key Takeaways
- Triple-I: universal life "offers you more flexibility than whole life insurance."
- Its cash value account generally earns a money market rate of interest.
- Once cash value has built up, you may be able to change premium payments, but if it gets used up, the policy might lapse.
- Check with the insurer or your agent before reducing or skipping premiums for long periods.
Frequently Asked Questions
What is universal life insurance?
Permanent life insurance with a cash value account that earns interest and flexible premiums once enough cash value has built up.
What's the difference between universal life and whole life?
Traditional whole life has a fixed premium on a set schedule. Universal life lets you change premium payments once there's enough cash value, and may let you increase the death benefit after a medical exam.
Can a universal life policy lapse?
Yes. Triple-I says that if you stop or reduce premiums and the savings get used up, the policy might lapse and your coverage will end.
Can I skip universal life premium payments?
Sometimes, if the cash value can pay the policy's monthly charges. Ask the insurer for an illustration of what happens to the cash value if you skip or reduce payments.
Related Terms
Related Coverages
- Life Insurance
Related Scenarios
Explore the rest of the Life Insurance category.
Browse Life Insurance terms →Sources
The factual claims on this page were checked against these sources. Rules and figures change, so check the source itself if you need to confirm the current version.
- iii.orgWhat are the different types of permanent life insurance policies? · Insurance Information Institute (Triple-I)
Educational information, not advice: This page is for general education only, not legal, financial, or insurance advice. Actual coverage, discounts, and requirements depend on your policy’s wording, your insurer, and the laws of your state. Confirm specifics with your own insurer or a licensed agent before making a decision. Insurpedia does not sell insurance and does not recommend specific insurers.