AAA Universal
Life Insurance

Both are permanent life insurance, meaning they last for your entire lifetime (or at least until an advanced age like 95, 100, or 110, depending on the policy). 

They have some key differences, however. Universal life insurance has more flexibility but offers fewer guarantees. 

Premium payments: Most universal life insurance policies have flexible premiums. So if your income fluctuates, you can pay more—or less—than your standard premium, within limits. If you vary your payments, it’s important to keep an eye on your policy because underpaying by too much could defund your death benefit. (An exception is guaranteed universal life insurance, an affordable type of life insurance that requires consistent premiums and has little cash value.) Whole life policies have higher premium payments, but they’re fixed and never change.

Death benefit: You can adjust your universal life policy’s death benefit to suit your evolving needs. Once your kids are grown and financially independent, for example, you might decide to lower your policy’s death benefit in order to lower your premium payments. If you want to increase the death benefit to help pay for your kids’ education, you can also do that (although it might require a medical exam). The death benefit isn’t guaranteed if you underpay your premiums, although you can buy guaranteed universal life insurance. Whole life insurance comes with a guaranteed death benefit.

Yes, you can cash out your universal life insurance. If you cancel or surrender your policy, you’ll receive the policy’s accrued cash value in a lump sum payment, minus any surrender fees. You can also sell your life insurance policy to a life settlement company for a lump sum payment. 

Before relinquishing your policy, though, consider the downside: Giving up your life insurance means your beneficiaries won’t receive a payout when you pass away. 

There are other ways to access your policy’s cash value while protecting your loved ones. You can make a withdrawal from the cash value, for example. As long as the withdrawal or surrender is less than the amount you’ve paid into your policy, you won’t pay income taxes. Be aware that borrowing against your policy may reduce your death benefit amount.

Another option is using your policy as collateral, where you can borrow money from your life insurance company without undergoing a credit check. You may have a lower interest rate, but if you don’t repay the loan, you’ll reduce your death benefit or cause premature lapse. If your insurance policy lapses, the IRS may consider that loan income, so there could be tax consequences. Your tax advisor can offer guidance.

Monthly premium costs vary and depend on factors like age and gender. The coverage amount also affects the cost of insurance, as does your health, any family history of chronic conditions, and even your job or hobbies—especially if they’re risky.

One benefit of universal life insurance is its flexible premiums. If you’re running low on cash, you can dial down your premium payments—or even skip a few. Make lower payments with care, so you maintain coverage. However, if you have guaranteed universal life insurance, you must make consistent premium payments and skipping a payment could cause your policy to lapse.

The younger and healthier you are, the better your premium rates will be. For some, it may be a good idea to buy life insurance in their twenties. Most younger adults aren’t thinking about the end of their life, but if you buy universal health insurance when you’re younger, premiums will be lower and there should be plenty of time for your policy’s cash value portion to grow.

When you buy universal life insurance, there are two main types of death benefit: a level death benefit and an increasing death benefit.

A level death benefit remains the same for the life of your policy. If you buy $500,000 worth of life insurance, that policy will pay your heirs a $500,000 death benefit—whether you pass away five years or 75 years after you buy the policy. Let’s say, for example, you live to age 90 and your $500,000 policy has accumulated $100,000 in cash value. Your beneficiaries will receive the $500,000 death benefit but not the $100,000 cash value.

An increasing death benefit grows over time. With this type of policy, your beneficiaries’ payout includes the cash value balance and the death benefit. If you have a $500,000 policy with $100,000 in cash value, your beneficiaries will receive $600,000. You’ll pay higher premiums for this type of policy.

Generally, a universal life insurance policy remains active for as long as you continue paying your premiums. If your account’s cash value can cover the costs of your policy, you might be able to stop paying premiums—at least for a while.

Universal life policies typically have a maturity date—perhaps when you turn 85 years old, or 105. When you reach the agreed upon age, your policy ends. You will then receive either the policy’s cash value or the death benefit.

No, universal life and whole life policies are both forms of permanent insurance and are not convertible. However, many term life insurance policies can be converted into universal life or whole life policies.