What Is Universal Life Insurance?

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Unlike whole life insurance policies for which an actuary determines the guaranteed premium based on anticipated mortality experience, expected interest earnings from invested premiums, and an estimate of future insurer expenses, universal life policies offer an unbundled approach.  Using this unbundled approach in universal life insurance policies, the insurer offers:

  • interest crediting on policy cash values based on current interest rates, with a guarantee the interest rate used will not be lower than a specified minimum, usually 3 percent to 4.5 percent
  • mortality rates, called cost of insurance rates, that reflect current mortality statistics, with a guarantee that they will not exceed a higher specified maximum shown in the policy
  • expense assumptions that reflect current insurer expense costs, with a guarantee they will not exceed a higher specified maximum shown in the policy

In essence, insurers consider the same things actuaries do in determining premium rates for their whole life insurance products and in separating the factors comprising the rates for their universal life insurance products.  Although insurers offer certain guarantees as to interest-crediting rates, cost of insurance rates, and expenses in their universal life insurance policies, they do not guarantee cash values nor do they guarantee that any particular premium rate level will cause a universal life insurance policy to remain in force for your entire life.  Insurers might offer optional features that provide additional secondary guarantees, including that the policy will not lapse provided you meet certain premium-payment and other conditions.

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A primary characteristic of universal life insurance, in addition to its crediting of interest at current interest rates, is its flexibility. Specifically, universal life insurance enables you to:

  • increase, decrease, or stop premium payments
  • increase (you will need to prove how healthy you are) or decrease the policy’s death benefit or change its death benefit option
  • access policy cash values through both policy loans and cash value withdrawals

Premium Payment Flexibility

Unlike whole life insurance policies that lapse if billed premiums are not paid exactly as billed and within the grace period, with universal life insurance you can choose:

  1.  to pay the billed premiums
  2.  to pay more or less than the billed premiums
  3.  to pay nothing at all

That doesn’t mean that a universal life insurance cannot lapse.  It’s just the process is different.

Premiums you pay for a universal life insurance policy are credited to the policy’s cash value on the monthly deduction day, along with any interest to be credited to the cash value.  Under certain policies, known as front-end load policies, the insurer deducts its business acquisition expenses before crediting premiums to the cash value.  The insurer makes a monthly deduction from the policy’s cash value.  In most cases, that includes a deduction for the following:

  • cost of insurance (COI)
  • insurer’s cost of doing business, i.e., its expenses

As long as the policy’s cash value is sufficient to allow the insurer to make the scheduled monthly deduction, the policy remains in force.  If the policy’s cash value is not sufficient to enable the insurer to make the monthly deduction, the policy will lapse unless the policy contains a no-lapse guarantee.  No-lapse guarantees require that you make premium payments at a specified minimum level and impose restrictions on your right to borrow or take cash value withdrawals.

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Death Benefit Flexibility

Universal life insurance policy death benefits are equally flexible.  You can reduce the death benefit or, by proving how healthy you are, increase it.  In addition, you may change the policy’s death benefit option so that the death benefit equals the specified amount or the specified amount plus the cash value.

Unlike whole life insurance policies, no replacement or additional policy is issued to effect the change in death benefits.  The original policy is simply changed to reflect the requested changes.

Increased Cash Value Access

The ability to access the funds in cash value policies differ.  In the case of whole life insurance policies, that access is done through policy loans or, if the coverage is no longer required, through a policy surrender.  Universal life insurance gives you increased access to cash values through both withdrawals and cash value loans.  Such cash value access may be restricted somewhat under no-lapse guarantees.

A cash value withdrawal from a universal life insurance policy does not permit you to repay the funds at a later date.  Any attempted repayment of a withdrawal is treated as though it were a new premium payment, and the attempted repayment could be subject to new expense charges normally taken from premiums.  Unlike a policy loan, no loan interest is charged on cash value withdrawals.

In taking a withdrawal:

  • policy death benefits and cash value are reduced by the amount withdrawn
  • a withdrawal charge might apply, but no loan interest is charged
  • no repayment is allowed
  • an attempted repayment is treated as a new premium payment and may incur premium expense charges


Universal life insurance policies generally have two options for death benefits—Option A and Option B that provide death benefits as follows:

  • a level death benefit, commonly known as Option A—Under death benefit Option A, the death benefit generally remains level at the specified amount stated in the policy for as long as it remains in force, subject to any  increases or decreases in the death benefit that you choose to make.  Part of the death benefit is comprised of cash value in the policy, and the remainder is risk to the insurance company  This is referred to as the “net amount at risk”.  The net amount at risk in any life insurance policy is equal to the difference between its accumulated value and its death benefit.  As the policy’s cash value increases, more of the death benefit is made up of cash value and less risk to the insurance company.  Although death benefit Option A is normally referred to as a level death benefit option, the death benefit may be increased to maintain the death benefit corridor required to ensure the policy continues to be considered life insurance.
  • a generally increasing death benefit, referred to as Option B—Under Option B, the death benefit is comprised of the specified amount and the policy’s cash value on the date of death.  Thus, the policy provides a generally increasing death benefit as the cash value continues to build.  However, the death benefit under Option B declines as the cash value declines.  Unlike the declining net amount at risk under Option A, the net amount at risk remains level throughout the life of the policy and is equal to the specified amount.   At your death, your beneficiary will collect benefits equaling the universal life insurance policy’s specified amount and the cash value.

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Written by:  Chris Lalor

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