Universal and Variable Universal Life: How Flexible Policies Work

Universal life is permanent life insurance built for flexibility. Instead of a fixed premium and fixed cash values, it works like an account inside the policy: money goes in, the insurer takes out the cost of insurance and other charges, and whatever is left earns interest. Variable universal life adds a twist by letting you invest that account in market-based options.

That flexibility is real, and so is the responsibility that comes with it. Regulators in New York and Texas warn that universal life policies need active attention, because a policy that isn't adequately funded can run out of money and lapse.

This guide is general information, not financial, investment, insurance or tax advice. Your state insurance department and licensed professionals can help you evaluate a specific policy.

How universal life works

Washington's Office of the Insurance Commissioner notes that universal life is also called "flexible premium adjustable life insurance." New York's Department of Financial Services (DFS) explains that it separates the three basic elements of a policy, the premium, the death benefit and the cash value:

1. The company credits your premiums to the cash value account.
2. Periodically, it deducts its expenses and the cost of insurance protection, often called the mortality charge.
3. The remaining balance earns interest at the rate the company credits.

DFS says the company sets a minimum interest rate and a maximum mortality charge in the policy, and some policies also set a maximum expense charge. The NAIC buyer's guide sums up the practical difference from whole life: you can choose a flexible premium payment pattern as long as you pay enough to keep the policy in force.

New York DFS adds that universal life usually offers two death benefit options. Under one, beneficiaries receive only the face amount. Under the other, they receive the face amount plus the cash value account.

The planned premium and lapse risk

Most universal life buyers pay a "planned premium" designed to keep the policy in force for life. New York DFS explains that this figure rests on assumptions about interest, expenses and mortality charges. If the assumptions prove too optimistic, you may have to pay more to keep the policy from shrinking or lapsing. If you pay less than planned, the policy may behave more like term insurance.

The Texas Department of Insurance (TDI), in its life insurance guide updated December 12, 2025, describes how this plays out. TDI says a universal life policy stays in effect until its maturity date, usually age 95 or 100, as long as there is cash value. If your premiums are lower than the cost of insurance, the difference comes out of the cash value, and if the cash value reaches zero, the policy could lapse. TDI even titled a consumer video "Universal life: Your policy may be evaporating."

Two forces make this worse over time. DFS notes that mortality charges increase as you get older, and that the insurer can raise mortality and expense charges up to the maximums in the policy. TDI adds that low interest rates can affect cash value, which might increase the premiums you need to pay. New York DFS issued a consumer alert in 2019 urging universal life owners to review their policies and understand the risks.

Annual statements and no-lapse features

TDI says the company will send a report each year showing your cash value and how long the policy might last, and that you should review it carefully because you might need to pay more to keep the policy in effect until maturity.

Some universal life policies include a no-lapse feature. TDI explains that it keeps the policy in effect even if your premiums aren't enough to cover the cost of insurance, but only if you pay the required premiums on time. Washington's insurance office adds that if you pay only the minimum premium needed for this feature, you won't build much cash value.

Surrender charges

Universal life policies usually charge you for leaving early. New York DFS describes two types: a front-end charge taken as a percentage of premiums paid, and a back-end charge applied only if you surrender before a specified period. As of October 2026, DFS's consumer page says that period is generally 10 years but could be as long as 20, and that the charge decreases each year you keep the policy. That means the cash surrender value you could actually walk away with may be well below the account value shown on a statement.

Indexed approaches

TDI notes that some permanent policies tie cash value growth to indexes, such as a stock market index, while others tie it to subaccounts you choose. How an indexed policy credits interest depends on terms in the contract, and those terms differ from policy to policy. Ask the insurer to explain in writing how crediting works, what limits apply and what minimum the policy states.

Variable universal life: investment risk inside the policy

The NAIC glossary defines variable universal life as combining the flexible premiums of universal life with a variable component, where the cash value depends on the investment results of separate accounts that the policyholder selects.

Washington's insurance office describes what that means in practice:

• the insurer puts your money into separate investment accounts, such as portfolios of stocks and bonds, that work much like mutual funds
• you choose the accounts and should receive a prospectus describing each one
• the value of those accounts changes the cash value and the death benefit
• you take the investment risk

The NAIC buyer's guide says variable policies have the greatest potential to build cash value but also the greatest risk of losing it. New York DFS adds an important warning: traditional variable life provides a minimum death benefit, but many variable universal products do not, and if investment results are poor, coverage will end unless substantially higher premiums are paid.

Because variable policies involve investments, the people selling them need extra credentials. TDI notes that in Texas, agents who sell variable life must hold a federal securities license and a state insurance license.

Questions to ask before you buy

• What premium is needed to keep the policy in force to maturity under the policy's minimum interest rate and maximum charges, not just under current assumptions?
• Is there a no-lapse feature, and what exactly must I pay to keep it?
• What are the surrender charges, and how long do they last?
• Which death benefit option am I choosing?
• For variable policies: which investment accounts are available, what do they cost, and what happens to coverage if they lose value?

TDI's broader shopping advice applies too: illustrations are projections, not promises, and you could earn less than shown. If you buy, TDI suggests checking with your agent each year to see how the policy is doing.

Key takeaways

• Universal life works like an account: premiums in, cost of insurance and expenses out, interest credited on the rest.
• Flexibility means you must fund the policy adequately, or it can lapse when the cash value runs out.
• Mortality charges rise with age and can be increased up to the policy's maximums, so review annual statements.
• Surrender charges can sharply reduce what you receive if you leave early.
• Variable universal life shifts investment risk to you and may not have a minimum death benefit.

Sources

• New York State Department of Financial Services, Life Insurance Information for Consumers
• Texas Department of Insurance, Life insurance guide (updated December 12, 2025)
• Washington State Office of the Insurance Commissioner, Types of cash value life insurance
• NAIC, Life Insurance Buyer's Guide (2026)
• NAIC, Glossary of Insurance Terms
• National Association of Insurance Commissioners (NAIC), Life Insurance consumer page
• Texas Department of Insurance, Do you need life insurance? (updated December 12, 2025)