Summary of universal life insurance

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.


Types of universal life insurance

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.