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Everything You Need to Know About Universal Life Insurance

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Universal life insurance is a type of permanent life insurance that—in theory—helps you grow your money and protect your family at the same time. Sounds like a win-win—but hang on! You should know the facts before you start contacting insurance companies.

Let’s uncover what insurance companies don’t want you to know about universal life insurance.

Universal Life Insurance Definition

Universal life insurance is a type of life insurance that lasts your entire life—into your 90s and beyond. It’s sometimes known as  cash value universal life insurance because in addition to the payout, it also has a savings account built into the policy. Another thing with universal life is that your premiums are adjustable, which means you might be able to use the cash value to adjust your payments.

How Does Universal Life Insurance Work?

Universal life insurance adds a few twists and turns on your standard whole life policy (kind of like an M. Night Shyamalan movie, but way less gripping and way more insurance-y).

Here’s how it works: You pay into the policy’s savings account whenever you pay your premium (the monthly fee that keeps your policy active). If you’ve built up enough cash value, you’re free to take some money out—like you would with a regular bank account. But it’s not as easy as you might think. I’ll explain why in a few minutes.

Your monthly fee gets split into two parts: One part pays for life insurance coverage, and the other part (aka the cash value) goes into a savings and investment account.

This type of life insurance is meant to be flexible because you choose how much premium you pay. The minimum premium amount covers your death benefit and administrative fees. Anything you pay over that is added to your cash value, which is guaranteed to grow according to a minimum annual interest rate set by the insurance company.

Many people choose to pay the maximum premium possible (which is set by the IRS) in the early years so they can build a larger cash value. Then they use that cash to cover premiums later in life. But this is a risky move since the cost of insurance increases the older you get! Question is, will you have enough cash value to cover it?

Cost Factors of Universal Life Insurance

For a universal life insurance policy to have any chance of working, you’d pay only a small amount toward the insurance coverage itself and as much cash as possible into the cash account. After all, you’re trying to give your loved ones a death benefit (which should be cheap) and provide a way to head off the rising cost of your insurance.

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And the cost will rise, because the insurance company takes on more risk as you get older. So what ends up happening is more and more of your premium goes toward keeping the policy in force, and less and less goes toward the cash value. Meanwhile, the cash value itself shrinks if you use it to cover your rising premiums. Now, there are some things that only get better as they shrink, like credit card debt, student loan payments, and a zit in the middle of your forehead on your wedding day. But cash value isn’t one of them.

Are you starting to see why universal life is a terrible, horrible, no-good scam that’s unlikely to benefit you or your family?

Advantages and Disadvantages of Universal Life Insurance

As much as I’m opposed to you buying a universal life insurance policy, it would be wrong to say there are zero benefits. (I’ll give credit where it’s due—even when it’s just a shred of credit—a "shredit” if you will.) Allow me to share the incredibly short list of the advantages of universal life insurance, and then we’ll look at the much longer list of drawbacks.



It is a form of life insurance, so it does mean your family or other beneficiaries will get a payout in the event of your death.

Some of your premium goes toward a cash value account, making universal life insurance way more expensive than a term life policy that only provides a death benefit. (Hint: We recommend term life all day long.)

Basically, universal life insurance is a bit better than running around with zero coverage of any kind, but not much better.

The cash value doesn’t get much return on investment, and falls way short of what you can expect if you invest in good growth stock mutual funds through tax-advantaged retirement accounts.


The administrative fees are out of control.


If your policy is indexed (more on indexed universal life insurance below), your premium can vary as markets fluctuate. That can do a number on your budget.


And here’s a reminder of the worst con of all: If you die before you’ve spent the cash value portion of a universal life insurance policy, all that money goes to the insurance company. Repeat: Your beneficiaries won’t see a dime of it. They’ll only get their defined payout.

Even though some people think of the cons listed above as advantages, the truth is universal life insurance is one of the worst types of life insurance you can buy.

What Are the Types of Universal Life Insurance?

Universal life insurance can get pretty complicated when you start to unpack it. In fact, there are actually three main types to choose from. That’s three types of life insurance you definitely don’t need—just like another free promotional drink koozie cluttering up your kitchen junk drawer, no-show socks that show, or luxury shampoo for your dog. (Well, that last one is debatable if it’s lavender oatmeal shampoo for your high-maintenance, luxury dog . . . )

Indexed Universal Life

You’ve heard of the stock market right? Have you heard of indexes like the S&P 500? The Dow Jones Industrial Average? Nasdaq? Those indexes are good indicators of how well—or not—the market is doing. For anyone with an indexed universal life insurance plan (IUL), their cash value is linked to one of these indexes. So, if the market is doing well, the cash value will go up.

But there’s a catch—the rate on an IUL will always be lower than the performance of the index it’s tied to because the insurance company takes their hefty share in fees. And if the market is not doing well—you guessed it—the value of your plan will drop. Sound dishonest? Yep, I agree.

Guaranteed Universal Life

If you don’t like the idea of having your premiums tied to market performance, the insurance agent may try to sell you a no-lapse guarantee universal life policy instead.

With these policies, your premiums stay the same because the interest rates are set from the very beginning of the policy. As long as you pay your premium, you’ll have coverage for the rest of your life. This is the least risky universal life insurance policy.

But here’s the rub. Since your premiums don’t adjust based on market performance, it hardly builds any cash value. That’s because guaranteed universal life insurance isn’t really designed to build cash. It’s too busy trying to keep up with the cost of insurance.

Variable Universal Life

Variable universal life insurance lets you invest your cash value into a sub account (kinda like a mutual fund), which is a pool of money managed by a team of investment pros. Your cash value makes up part of that pool, and it’s invested into lots of different companies at once.

Don’t get me wrong. Mutual funds are a fantastic way to invest because they diversify your risk (that’s just fancy Wall Street talk for making sure you aren’t putting all your investment eggs in one basket). But you’ve got much better options for investing in mutual funds than doing it inside a life insurance policy.

Here’s the deal: Life insurance is meant to support your loved ones if you die—it’s not supposed to be an investment. And all that investing ain’t cheap—insurance companies charge huge fees that’ll take a major bite out of your earnings.

As you’ll see in just a bit, it doesn’t matter which of these types of universal life insurance you choose. All three policies come with killer fees. (Which stings only slightly less than killer bees.) If you want the best bang for your buck, you’ll keep your life insurance and your investments separate.

How Does Universal Life Insurance Compare to Others?

I’m clearly not a big fan of universal life insurance as a product, but when you compare it with other offerings in the life insurance space, the problems become more glaring. Take a look.



Whole Life


Coverage Period



Specific term (usually 10, 15, 20 or 30 years)

Premium Type




Cash Value












Primary Use

Overpriced death benefit

Overpriced death benefit

Death benefit at a reasonable price

What’s the Difference Between Whole Life and Universal Life?

Chances are, if you’re here reading about universal life insurance, you’ve probably heard of whole life insurance too. Both are designed to provide long-term life insurance coverage. Both build cash value. And both are terrible ideas! But here’s how they compare.

The Premiums

Universal life comes with what insurance geeks call flexible premiums. An advantage of owning a flexible premium life insurance policy is you’ll have some say in how much you put into your policy’s cash value and how much you’ll pay in premiums. The disadvantage is the flexibility only goes as far as the insurance company allows.

On the other hand, whole life premiums are fixed, so they can’t change even if you want them to.

The Penalties

Whole life and universal life have this in common—there are plenty of strings attached. Thinking about accessing some universal life cash value to cover that long-awaited nose job or outdoor jacuzzi? It’s coming out of your death benefit. (Your nose is beautiful just the way it is, and jacuzzis are kind of high maintenance without a pool guy, by the way.) And whole life withdrawals come with a penalty too. If you take out a loan against your cash value, you’ll have to pay it back with interest. Ugh.

Here’s another whole life penalty. If you surrender (aka cancel) your whole life policy, you’ll be punched in the financial face with a painful surrender charge—and you won’t have life insurance coverage anymore. I’m sorry, but I don’t want to get beat up by a policy that’s supposed to be helpful. That’s some schoolyard bully energy right there.

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Universal vs. Term Life Insurance

Unlike universal life, term life insurance only lasts for a set number of years. I recommend a term of 15 to 20 years. And it’s just life insurance—nothing more, nothing less. Without that cash-value dead weight, the premiums are much, much cheaper. Hallelujah!

So, if you were to take the money you’d save by getting term life insurance instead of universal and invest it in mutual funds for 20 years, you’d end up with a whole lot more money than if you bought universal life insurance! And all of that money would go into your pocket—not to the insurance company.

Plus, you won’t need universal’s lifetime coverage if you start investing because you’ll eventually become self-insured.

Wait. What does self-insured mean?

Just this. If you invest 15% of your household income for the next 20 years, by the time your term life plan comes to an end, you won’t even need that death benefit—you’ll have built enough wealth on your own to be self-insured and provide for your family without life insurance.

That’s why you should never treat your life insurance as an investment. Life insurance has one job—to replace your income and provide for your family if you die. Always keep your investments separate from your life insurance.


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How Much Does Universal Life Insurance Cost?

The cost of universal life insurance depends on your age, gender, habits and overall health. But one thing’s for sure regardless of any of those things: You’ll get a cheaper—and better—deal with term life insurance.

The fees you’ll pay for a cash value universal life insurance policy are huge. There are fees to have the insurance in the first place, fees to cover commissions, and fees to cover expenses for the insurance company. And the thing is, because of those crazy-high fees, you’ll build zero cash value in the first few years.

Trust me: The insurance company will make more off of a universal life insurance policy than you will.

How much does term life insurance cost?

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Get Expert Help to Choose the Right Life Insurance

To really understand universal life (or any kind of life insurance), there’s one key thing to keep in mind—life insurance isn’t supposed to be permanent, unlike the unfortunately spelled “no ragrets” tattoo haunting that high school bully’s scrawny bicep for the rest of his days. It also shouldn’t be an investment. So don’t overcomplicate it with a permanent policy. Keep it simple with term life and invest the money you save somewhere smart. By investing outside of your insurance, you can control how and where you use your money.

Listen, I know this insurance concept can seem like a racket. And there are some confusing schemes out there masquerading as legit products. But getting the right coverage is a big deal.

If you're wondering about the next righ step to get covered, I've got some ideas for you here.

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Frequently Asked Questions

In the world of cash value life insurance, universal life insurance, along with variable and whole life insurance, are like the three amigos (minus the sparkly hats and misadventures through Mexico). They provide life insurance coverage, but they also act as a savings account. Cash value is the cash buildup in that savings account.

Here are some things you should know about each of the three amigos. Whole life insurance returns tend to barely keep up with—and sometimes fall below—inflation. Universal life and variable life rates of return fluctuate more. And while they can outperform whole life, as I’ve said over and over again, the fees tacked onto universal life insurance policies will eat you alive.

Universal life insurance has a lot of disadvantages, but the worst part is what happens to your cash value when you die. The only payment your family will get is the death benefit amount. The insurance company keeps any cash value you managed to build.

Just let that sink in a minute.

Plus, if you ever withdraw some of the cash value, that same amount (or more) will be subtracted from your death benefit amount. That’s a lose-lose situation. You can faithfully invest for decades, but inevitably that money will go back to the insurance company.

The truth is, that’s how some life insurance companies make their money—and it’s why they’re so quick to sell universal life insurance to you in the first place. Don’t let them fool you!

While you can probably withdraw some cash from a universal life policy at any time, there are always strings attached. You will be reducing the future death benefit intended to help support your family if you die. Plus, there could be tax consequences for doing so.

Not at all! The cash value portion has too many limits on it to grow much or very fast. I’m talking about all kinds of fees. Then there’s the fact that if you ever want or need to access the cash value, those withdrawals will reduce the size of your death benefit. This is a horrible investment, any way you look at it.

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George Kamel

About the author

George Kamel

George Kamel is the #1 national bestselling author of Breaking Free From Broke, a personal finance expert, a certified financial coach through Ramsey Financial Coach Master Training, and a nationally syndicated columnist. He’s the host of the George Kamel YouTube channel and co-host of Smart Money Happy Hour and The Ramsey Show, the second-largest talk radio show in America. George has served at Ramsey Solutions since 2013, where he speaks, writes and teaches on personal finance, investing, budgeting, insurance and how to avoid consumer traps. He’s been featured on Fox News, Fox Business and The Iced Coffee Hour, among others. Learn More.

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