Universal life insurance
Universal life insurance (UL) is one of the two main types of permanent life insurance (the other is whole life insurance). Like whole life, a universal policy can provide lifetime protection while building cash value with tax advantages.1 UL also gives you the flexibility to raise or lower premiums within certain limits, so it can cost less than whole coverage.2 But it also offers fewer guarantees than whole life because if you make minimal premium payments for too long, it can impact cash value growth and the size of your death benefit.3
Why people choose universal life insurance:
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Lifetime protection |
From the first day the policy is in effect, UL can provide an income tax-free death benefit to help protect your family’s financial wellbeing.4 And as long as you keep a positive cash value amount, your coverage can’t be canceled. |
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Cash value |
Like all permanent life insurance, it has a built-in cash value that grows over time and earns interest.5 You can take out policy loans against the cash value, use it to pay your premiums, or even use your coverage for cash to supplement your income in retirement.6 |
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Flexible premiums |
UL lets you raise or lower your payments within certain limits as your circumstances change. While you may eventually have to pay higher premiums to keep your coverage, that flexibility can make it easier to keep your insurance policy in force if your earnings vary. |
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Tax advantages |
The policy’s cash value grows on a tax-deferred basis, so no taxes are owed on current earnings or interest. Also, the death benefit is paid income-tax-free to beneficiaries. |
The flexibility and freedom of universal life also mean that there are fewer guarantees
In a whole life policy, the premiums, cash value growth, and death benefit are guaranteed not to change. With UL, all those things are designed to be flexible. However, the amount of premiums you pay affects cash value growth. And as you use funds from the cash value, it will affect the amount your family receives when you’re gone. It could even cause the policy to lapse, so you should stay in contact with your financial professional to help make sure your policy continues to meet your needs.
Checklist: Is universal life insurance right for me?
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What I want: |
What I should get: |
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I want life-long protection |
Whole or universal life |
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I want to build tax-advantaged cash value |
Whole or universal life |
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I want access to policy cash while I’m alive |
Whole or universal life |
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I want the flexibility to raise or lower my premiums |
Universal life insurance |
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I want affordable permanent coverage |
Universal Life insurance |
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I want guaranteed cash value growth |
Whole life insurance |
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I want a guaranteed death benefit |
Whole or term life |
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I want guaranteed level premiums |
Whole or term life |
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I want the biggest death benefit per premium dollar |
Term life insurance |
There are two parts to every premium payment
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COI The cost-of-insurance component |
CASH VALUE The wealth-building component |
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The COI covers the cost of providing the death benefit and life insurance company administrative fees. It’s typically the minimum premium needed to keep the policy in effect, and the COI rises over time because it is based mainly on the policyholder’s age. |
Any premiums paid over the COI amount add to the policy’s cash value, subject to an upper limit set by the IRS. Different policies calculate cash growth in different ways. With Guardian, the minimum interest rate is guaranteed never to be lower than 2% annually – and it can go higher. |
Note that minimum premium payments reduce the accumulation of cash value. As COI rises over time, it can result in cash value erosion, to the point that the insurer may require higher premiums in later years to prevent coverage lapse. That’s why many people choose to build the cash value by paying maximum premiums for the first several years – then using those funds if needed to help lower premium costs later on.
How universal life insurance compares to other options
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Universal Life Insurance |
Whole Life |
Term Life |
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Coverage period |
Lifetime |
Lifetime |
Limited to a specific term (typically 10-30 years) |
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Premiums |
Can vary |
Fixed |
Fixed |
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Builds cash value |
Yes, but not guaranteed |
Yes, with guarantees |
No |
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Dividends |
No |
Yes |
No |
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Cost |
More expensive than term; but often less than whole life |
More expensive than term |
Less costly than whole life or universal life |
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Income tax-free death benefit |
Yes |
Yes |
Yes |
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Investment options |
Standard – No Variable – Yes7
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Guardian provides options; other companies may or may not |
No |
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Primary uses |
Death benefit for beneficiaries; tax-deferred asset accumulation; tax-advantaged wealth preservation and transfer |
Death benefit for beneficiaries; tax-deferred asset accumulation; tax-advantaged wealth preservation and transfer |
Death benefit for beneficiaries |
Want the opportunity for more cash growth? Consider variable universal life.
Variable UL gives you the same kind of lifetime protection and payment flexibility as standard universal life with more investment options: you can invest part or all of your cash value in “subaccounts” that are similar to mutual funds. However, you have to choose and manage investments as you would in a brokerage account. And as with a brokerage account, you also assume more risk, including the possibility of losing part or all of your principal.
How to get universal life insurance
Universal life coverage can be a powerful financial tool that can help protect your family’s financial wellbeing for decades to come. It can give you the flexibility to help build assets, deal with life’s uncertainties, and even pass on wealth to the next generation. Each policy is tailored to the policyholder’s personal needs and financial strategy, and while premiums are flexible, a healthy 40-year old male should expect to invest about $8,000 a year for a $1,000,000 UL policy. But guidance is needed to arrive at the right solution for your needs. If you think this type of insurance is right for you, discuss your situation with an insurance professional or financial professional with life insurance experience. If you don’t know such a professional, ask a friend or colleague for a recommendation. Or, Guardian can connect you to a financial professional who can help.
Frequently asked questions about universal life insurance
What are the benefits of universal life insurance?
Universal life is a flexible way to get a permanent life insurance policy and build cash value. The premiums are flexible: you can raise or lower payments within certain limits set by the insurance company. It can be a solution to cover people with variable incomes because the cash value also allows them to make withdrawals and policy loans.
What are the disadvantages of universal life insurance?
With more options than term or even whole life coverage, a UL policy can be complex. The policy needs to be managed: you need to determine how much you want to pay for premiums, and with variable UL, you also have to make investment choices. Those variables, along with a cost of insurance that increases over time, can affect and even detract from the value of your cash value. So you also have to keep an eye on your value balance over time: If it goes down to zero, your premiums could go up, or the policy may lapse.
What is the difference between whole and universal life insurance?
A UL policy gives the insured person many of the same permanent protection and benefits as whole life coverage, along with the added benefit of a flexible premium to help accommodate variable earnings. In addition, depending on the life insurance company and policy, you may also have the option to invest your cash value in a variety of market-based investment options, giving you the potential for more growth. On the other hand, universal life offers fewer (and/or lower) cash value guarantees.
