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 not only whether universal life is right for you, but also the types available.

Guaranteed universal life insurance (GUL)

Summary: Guaranteed universal life insurance can last as long as you live, provided you make the payments on time. The amount of death benefit 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 cash value.

More: Cash value life insurance

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 you can't afford it. 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.

Watch out for: The biggest risk with these policies is making a late payment. If you're even one day late, your policy could lapse and you'd forfeit it, losing all premiums already paid in. No matter what life's circumstances bring in the future -- affecting finances -- you would 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, as you often can with other types of universal life.

There's generally little or no cash value in this 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.

Guaranteed universal life insurance rates

We looked at rates for a $250,000 policy for men and women at different ages and found whole life to be about twice as expensive as guaranteed universal life.

Another cheaper option would be a 30-year term life policy, if term life fits your financial needs. For a $250,000 policy, GUL is more than four times more expensive than 30-year term life.

Keep in mind that other policy amounts and ages will have different cost differentials among the three types, so it's best to get quotes for all the types and coverage levels you're considering.

Comparison: Costs of a $250,000 life insurance policy

Comparison: Annual cost of term life, universal life and whole life
Gender and age 30-year term life Guaranteed universal life (to age 100) Whole life
Male age 30 $277 $1,210 $2,477
Male age 40 $354 $1,698 $3,671
Female age 30 $238 $1,031 $2,227
Female age 40 $293 $1,403 $3,242
Source: EverQuote research. We average the three cheapest rates found for term and universal life and the two cheapest rates found for whole life. Rates are for men and women of average height and weight, in very good health. Your own rates will be different.

More: Life insurance rates

Indexed universal life insurance (IUL)

Summary: Indexed universal life 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.

Watch out for: Your index could go gangbusters 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 change that you'll 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

Index change x participation rate = Interest rate you get, but not higher than the cap or lower than the floor

Variable universal life insurance (VUL)

Summary: Variable universal life 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 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.

Watch out for: You select your investments and need to be active in monitoring them. If your underlying investments go down, the policy could lapse due to 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.


Sales of universal life insurance


Other life insurance options

Term life insurance: If you're looking for the cheapest way to get life insurance, term life insurance is the way to go. It's cheap because it lasts for only a certain number of years, such as 10, 20 or 30, and it has no cash value. If your looking to have life insurance for a specific period of time, such as the years of a mortgage, term life is a good fit.

Whole life insurance: Whole life insurance provides coverage for as long as you live. The premiums and death benefit stay the same. It is an expensive way to buy permanent life insurance, but it has a lot of guarantees.