How Universal Life Insurance Works

Life insurance can provide a lot more than just a death benefit. It can be one of the most flexible, tax-advantaged parts of your financial plan. Not only is your family protected through a death benefit that never expires, but universal life insurance also accumulates cash value that can grow in a tax-advantaged way and be used for any need at any time.  

In addition, universal life insurance gives you more flexibility than a traditional whole life insurance policy when it comes to your premiums and death benefit, making it an excellent option for people who have more sophisticated financial planning needs. Here’s how universal life insurance works. 


Universal life insurance allows you premium flexibility. Each year, you’ll know exactly what you’ll owe for your policy’s expenses. You then need to make premium payments to cover the expenses, but you can pay more. That additional accumulated cash value will be credited interest and grow over time and can be used to cover future policy expenses, or you can access it at any time for any reason. 

You have freedom to adjust the premium year to year. Universal life insurance gives you the flexibility to adjust the amount of your premium payment (as opposed to having a fixed payment each year). There may be years that you want to pay more into the policy than your minimum premium requires so that you can build more equity. Some years, you may want to spend less on your premiums, which is OK as long as you have enough cash value to cover your policy expenses. 

Your coverage is designed to last your whole lifetime. As long as your policy’s cash value is substantial enough to cover the policy’s costs, a universal life insurance policy will pay a death benefit someday. That’s a key difference from a term life insurance policy, which expires at the end of the term. 

You can build equity. With universal life insurance, as you pay premiums, your policy builds equity. That accumulated value, often called cash value, is in addition to the death benefit. The cash value is credited interest daily. The value is backed by the performance of the Northwestern Mutual general account portfolio, which is managed to build stable long-term value no matter what’s happening in the financial markets. 

A key benefit of universal life insurance is the flexibility to adjust the premium payments as opposed to having a fixed payment.

This money can be used anytime and for any reason, be it for an emergency like an unexpected home repair or an opportunity like a business investment. You can even use your cash value to pay off future premiums. 

You can access your cash value. The cash value of your universal life insurance becomes an asset that you can use at any time for any purpose.1 When accessing your cash value, you have a few options to consider: 

  • A loan against your cash value. You can take a loan against your cash value from the insurance company. Repayment of the loan is flexible, but interest will accrue. Another option is to use your policy’s cash value as collateral for a loan from your bank. A loan can be a tax-advantaged way to access your cash value. That’s because you won’t owe any income tax on policy growth as long as the policy stays in place. 

  • Surrender a portion of your policy. If you need to access your cash value and no longer need your full death benefit, you can withdraw a portion of your policy. This allows you to keep some life insurance death benefit in place. This can also be helpful from a tax perspective. That’s because when you withdraw from a policy, you’ll owe ordinary income tax only on any cash value above the basis that you paid into the policy. The return of basis (money you put in) would be tax-free. 

  • Surrender your entire policy. In this case, you can take all the cash value in your policy, but you also surrender all your life insurance. If your cash value is worth more than the basis that you paid in, you will owe ordinary income tax on that amount.  

If you’re thinking about using your cash value, your financial representative can help you think through the best options for your situation. 

You can increase — or decrease — your death benefit. Perhaps you have a change in your coverage need, or you want to adjust your premiums. With universal life insurance, you are allowed to switch from a level death benefit to an increasing death benefit (or vice versa). In fact, there are strategies that can allow you to maximize your cash value growth by taking advantage of your policy’s death benefit option. It’s a good idea to talk to your financial representative to learn about the pros and cons of switching your policy’s death benefit option. 

You could use it in retirement. Investments in a 401(k), IRA or other accounts are subject to the will of the market, which means you could have bountiful years or years of significant loss. Because your universal life insurance accumulated cash value is stable and predictable, during retirement you could tap it as a stable source of funding during market declines in order to avoid selling investments at a time when they have lost value. 


With a universal life insurance policy, it’s a good idea to make sure you’re reviewing it regularly. Here are key times you may want to look at your policy. 

During an annual review with your financial representative. One of the great benefits of universal life insurance is its flexibility. But that also means that you need to make sure you’re managing your premium payments properly. It’s good to check in on this at least once a year with your financial representative. 

Changes in family situation. When you have a change in your family situation such as divorce or the birth of a child, you want to review your policy to make sure the beneficiaries listed are still correct. 

When you update your estate plan. Life insurance beneficiary designations trump what’s in a will. That means any time you’re updating your will, it’s a good idea to also look at your insurance policies or other accounts to make sure the beneficiaries listed match what’s in your will. 

A universal life insurance policy can give you the confidence and peace of mind that your family will be protected when you’re gone. In addition, it allows you to build an asset that you’ll be able to use throughout your life. That kind of security makes it easier to focus on the people and things that matter most to you. 

1 Any distributions from a life insurance policy will reduce the death benefit. There may be tax consequences to using your accumulated value. Please consult your tax advisor.


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