Universal and variable life insurance are both permanent policies that build cash value. But they differ in two major ways: how they treat that cash value, and how they treat premiums.
Universal vs. variable life insurance
These are the key features of these types of permanent policies:
|Guaranteed death benefit|
|Builds cash value|
|Guaranteed cash value returns|
|How cash value grows||Based on the performance of your investments.|
|Premium payments||Flexible — the policyholder can adjust the amount and frequency of payments.|
|Potential to earn dividends||Yes — if you’re with a mutual life insurance company.|
How does each policy earn money?
Both universal life and variable universal life have an investment component. However, here’s how your cash value is invested differently between universal and variable life insurance:
- Universal life insurance. Your cash value earns interest at a rate set by the insurer. That figure can rise and fall to reflect current interest rates, but by law, it can’t drop below 2%. Your insurer will also set a minimum interest rate, which might be higher. In this way, the returns on universal life insurance policies are more predictable.
- Variable life insurance. At purchase, your insurer will present a portfolio of subaccounts, like stocks, bonds and mutual funds. You can choose how you want to invest your cash value. Your insurer manages these accounts, and your cash value grows in line with the performance of those investments. Unlike universal life, the amount of money you can earn with variable life insurance isn’t capped.
Which policy is right for me?
If you want to use life insurance for investment purposes, both policies work. But the best policy for you comes down to your risk tolerance, and how much control you want over the way your cash value is invested.
- Universal life insurance. If you’re more risk-averse but want to take advantage of flexible premiums, universal life could be a good fit. Just keep in mind that tweaking your premium might also change your coverage and death benefit amount.As for the investment component, the insurer will cap your cash value returns, so be sure to ask about the “participation rate” before signing up. If the limit seems low, shop around to learn the rates set by other insurers.
- Variable life insurance. The cash value of variable life policies is invested more aggressively, and it’s subject to market conditions. This means there’s a greater potential for returns and losses. There’s also no guarantee on return, so if your investments perform poorly, you might be left with a lower cash value or higher premiums.If you’re comfortable with risk and have a background in investing, you might be willing to take the gamble. You’ll also have more of a say over the investments.Thanks to the level of risk and uncertainty, variable life policies are offered by prospectus only.
Will I pay tax on either policy?
Like all permanent policies, the cash value grows tax-deferred and isn’t considered to be taxable income. For this reason, universal and variable life policies are ideal for those who want to build a tax-free inheritance for their beneficiaries.
You can benefit from the tax break during your lifetime, too. Once you’ve accumulated enough cash value, you can start taking out tax-free loans against your policy, using the cash value account as collateral.
How does variable universal life insurance work?
This hybrid policy combines features from variable and universal life insurance. It’s a permanent policy that offers flexible premiums and the ability to invest your cash value in the investments of your choice.
If your investments are performing well, there’s potential for exponential returns. But if the market dips, that loss could diminish your cash value, and your insurer might charge a higher premium to compensate.
Compare permanent life insurance
Compare other types of insurance products side by side
- Whole life vs. variable life
- Term vs universal life insurance
- Whole life vs. universal life insurance
- Term vs. whole life insurance
Both policies offer flexible premiums and become a cash asset over time. But they differ in their approaches to investment: universal life insurance grows at a fixed rate, while variable life insurance is subject to the ups and downs of the market.
As part of your research, be sure to compare life insurance providers.
More guides on Finder
Nowly insurance review
Apply for online term life insurance with Nowly and enjoy low premiums, special health benefits and a money back guarantee – with no need for a medical exam.
Wyshbox life insurance review
Track your debts and needs to keep the coverage amount that fits your life stage.
Walnut life insurance review
Try this life insurance membership with free wellness perks but short life insurance terms.
5 best life insurance companies for parents
The 5 best life insurance companies for parents at different stages of life.
Dayforward life insurance review
Dayforward’s innovative income-replacement life insurance product appeals to many parents seeking simple life insurance solutions.
Life insurance for seniors over 70
A final expense life insurance policy may be your best option in your 70s, especially if you have prior health problems.
Lemonade life insurance review
This fintech just branched out into low-cost life insurance — but its lineup is limited.
Compare teledermatology options
Get the skincare you need without taking a trip into your doctor’s office.
Life insurance wellness programs
Get an incentive to meet your existing health and fitness goals with a discounted premium.
Combined life insurance review May 2022
Find unusually low face values for a whole life policy, ideal for supplemental insurance.
Ask an Expert