Finder is committed to editorial independence. While we receive compensation when you click links to partners, they do not influence our opinions or reviews. Learn how we make money.

Universal vs. variable life insurance

How these policies earn money is the biggest difference

Updated

Fact checked

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:

Universal life insurance
Variable life insurance
Lifelong coverage
Yes
Yes
Guaranteed death benefit
Yes
Yes
Builds cash value
Yes
Yes
Guaranteed cash value returns
Yes
Yes
How cash value grows
According to a fixed interest rate set by the insurer.
Based on the performance of your investments.
Premium payments
Flexible — the policyholder can adjust the amount and frequency of payments. And once you’ve built up enough cash value, you can use it to pay your premiums.
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.
Yes — if you’re with a mutual life insurance company.
  • Compare multiple providers
  • Calculate how much coverage you need
  • Get a quote in 2 minutes

Get a FREE life insurance quote

What's Your Birthdate?
Where Do You Live?
What Is Your Gender?

More info
Promoted

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

Name Product Issue age Minimum Coverage Maximum Coverage Medical Exam Required
Sproutt
18 - 100 years old
$50,000
$3,000,000
No
This life insurance broker combines technology and the human touch to match you with a policy tailored to your needs.
Policygenius
18 - 85 years old
$10,000
$10,000,000+
Depends on provider and policy
Compare affordable quotes from 12+ A-rated life insurance companies side-by-side.
Bestow
21 - 54 years old
$50,000
$1,000,000
No
Affordable 10- and 20-year term life insurance policies with instant quotes and no medical exams.
Everyday Life
20 - 75 years old
$100,000
$10,000,000
No
Build a customized laddering strategy to target specific financial responsibilities and save on term life.
Fabric
25 - 60 years old
$100,000
$5,000,000
Depends on policy
Get affordable term life insurance with accelerated underwriting or no-exam coverage up to $1,000,000. Available in all states except CA, NY and MT.
loading

Compare up to 4 providers

Bottom line

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.

Ask an Expert

You are about to post a question on finder.com:

  • Do not enter personal information (eg. surname, phone number, bank details) as your question will be made public
  • finder.com is a financial comparison and information service, not a bank or product provider
  • We cannot provide you with personal advice or recommendations
  • Your answer might already be waiting – check previous questions below to see if yours has already been asked

Finder.com provides guides and information on a range of products and services. Because our content is not financial advice, we suggest talking with a professional before you make any decision.

By submitting your comment or question, you agree to our Privacy and Cookies Policy and finder.com Terms of Use.

Questions and responses on finder.com are not provided, paid for or otherwise endorsed by any bank or brand. These banks and brands are not responsible for ensuring that comments are answered or accurate.
Go to site