Universal life insurance is a form of insurance that can last your entire life. There are a few varieties of universal life, providing different flexibility and ways to grow (or lose) cash value. It's important to understand the differences.
Guaranteed universal life insurance
Summary
Guaranteed universal life (GUL) insurance can last as long as you live, assuming you make the payments on time. The death benefit amount for your beneficiaries is guaranteed and your premiums don't change. It's the cheapest way to buy life insurance that will pay out no matter when you die.
These policies are sometimes called "no lapse universal life."
This type of policy is for people looking mainly for a death benefit for beneficiaries, at a cheap price, and who don't care about building up cash value.
GUL policies let you select the age up to which your premiums stay the same. The higher the age, the more the policy will cost. If you live past that age, the policy could expire or become so expensive to maintain that it’s unaffordable. Some GUL policies let you select a guarantee up to age 121. If you're healthy and have relatives who lived a long time, choosing age 90, for example, would be risky.
What to watch out for
The biggest risk with GUL policies is making a late payment. If you're even one day late, the policy could lapse and you'd forfeit it, losing all premiums already paid in. No matter what life's circumstances bring in the future that affect finances, you need to pay on time. Read the policy closely before you buy to find out the consequences of a late payment. If you're occasionally late with bills, this is not the policy for you.
You typically can't change the death benefit amount with guaranteed universal life insurance, but you often can with other types of universal life.
There's generally little or no cash value in a GUL policy. Because there may be no cash value, there's no "surrender value." If you decide you don't want the policy later on you can walk away but won't get any money back. If you're looking for a lifelong policy with cash value, look at whole life insurance or the other types of universal life.
Indexed universal life insurance
Summary
Indexed universal life (IUL) insurance policies can last your entire life and often let you vary your premiums and death benefit, within certain limits. This kind of policy can give you flexibility in the future.
It builds cash value, and gains are tied to an index such as the Nasdaq 100, Russell 2000, S&P 500 or even a combination. You will likely have a choice of index. While your cash value is calculated using the index, it doesn't mean your cash value is actually invested in that index.
An IUL policy might guarantee that your interest rate will never be less than zero. This number is called the index floor. So if your index tanks, you won't lose cash value.
What to watch out for
Your index could make amazing gains but that doesn't mean your cash value will balloon as well. Your interest rate will likely be limited by the policy's participation rate and cap:
- The participation rate is the portion of index upside that you'll actually get. For example, if the index goes up 8% and your participation rate is 50%, you'll get credited for 4%.
- The cap is the maximum interest rate that will be used to calculate your gains.
Example of IUL calculation for gains
Index change x participation rate = Interest rate you get, but not higher than the cap or lower than the floor
Variable universal life insurance
Summary
Variable universal life (VUL) insurance policies allow you to vary premiums payments and the death benefit, within certain limits. This type of policy is for people who want to build cash value and manage their own investment choices.
Your cash value can be invested in multiple "sub accounts" such as stocks, bonds or money market accounts. There may be an option with a fixed interest rate as well. You can typically access the cash value through policy loans or withdrawals.
If you decide you don't want the policy you can cancel it and take the surrender value, if any. There are typically surrender charges if you want out in the first several years. The policy will spell out the surrender charges.
What to watch out for
With a VUL policy you select your investments and need to be active in monitoring them. If the underlying investments go down, the policy could lapse (meaning terminate) due to a lack of cash value. In other words, you could lose all your money.
A lot of your premiums could be eaten up by fees and charges, including fund management fees. That means less money toward cash value.
Average annual rates for a $500,000 UL policy
| Sex and age | Universal life to age 100 or older |
|---|---|
| Male age 25 | $1,763 |
| Male age 30 | $1,763 |
| Male age 35 | $2,549 |
| Male age 40 | $3,052 |
| Male age 45 | $3,626 |
| Male age 50 | $4,648 |
| Male age 55 | $5,821 |
| Male age 60 | $7,408 |
| Female age 25 | $1,560 |
| Female age 30 | $1,909 |
| Female age 35 | $2,246 |
| Female age 40 | $2,689 |
| Female age 45 | $3,236 |
| Female age 50 | $4,170 |
| Female age 55 | $5,121 |
| Female age 60 | $6,391 |
| See methodology below | |
Average annual rates for a $1,000,000 UL policy
| Sex and age | Universal life to age 100 or older |
|---|---|
| Male age 25 | $3,231 |
| Male age 30 | $3,996 |
| Male age 35 | $4,699 |
| Male age 40 | $5,815 |
| Male age 45 | $6,870 |
| Male age 50 | $8,616 |
| Male age 55 | $11,158 |
| Male age 60 | $14,208 |
| Female age 25 | $2,879 |
| Female age 30 | $3,584 |
| Female age 35 | $4,239 |
| Female age 40 | $5,206 |
| Female age 45 | $6,066 |
| Female age 50 | $7,762 |
| Female age 55 | $9,725 |
| Female age 60 | $12,181 |
| See methodology below | |
Average annual rates for a $2,000,000 UL policy
| Sex and age | Universal life to age 100 or older |
|---|---|
| Male age 25 | $6,462 |
| Male age 30 | $7,993 |
| Male age 35 | $9,398 |
| Male age 40 | $11,629 |
| Male age 45 | $13,741 |
| Male age 50 | $17,233 |
| Male age 55 | $22,316 |
| Male age 60 | $28,377 |
| Female age 25 | $5,718 |
| Female age 30 | $7,127 |
| Female age 35 | $8,437 |
| Female age 40 | $10,373 |
| Female age 45 | $12,131 |
| Female age 50 | $15,484 |
| Female age 55 | $19,410 |
| Female age 60 | $24,323 |
| See methodology below | |
Average annual rates for a $3,000,000 UL policy
| Sex and age | Universal life to age 100 or older |
|---|---|
| Male age 25 | $9,692 |
| Male age 30 | $11,989 |
| Male age 35 | $14,097 |
| Male age 40 | $17,444 |
| Male age 45 | $20,611 |
| Male age 50 | $25,849 |
| Male age 55 | $33,475 |
| Male age 60 | $42,546 |
| Female age 25 | $8,556 |
| Female age 30 | $10,669 |
| Female age 35 | $12,635 |
| Female age 40 | $15,539 |
| Female age 45 | $18,197 |
| Female age 50 | $23,206 |
| Female age 55 | $29,095 |
| Female age 60 | $36,465 |
| See methodology below | |
Average annual rates for a $5,000,000 UL policy
| Sex and age | Universal life to age 100 or older |
|---|---|
| Male age 25 | $16,154 |
| Male age 30 | $19,982 |
| Male age 35 | $23,495 |
| Male age 40 | $29,073 |
| Male age 45 | $34,352 |
| Male age 50 | $43,082 |
| Male age 55 | $55,791 |
| Male age 60 | $70,885 |
| Female age 25 | $14,234 |
| Female age 30 | $17,756 |
| Female age 35 | $21,031 |
| Female age 40 | $25,872 |
| Female age 45 | $30,328 |
| Female age 50 | $38,651 |
| Female age 55 | $48,465 |
| Female age 60 | $60,749 |
Methodology for rates: We averaged the three cheapest rates we found online for guaranteed universal life insurance. Rates are for men and women of average height and weight, non-smoking, with normal blood pressure, in excellent health, with no DUIs or tickets on their driving records. Your own rates will be different. | |