The different kinds of universal insurance policies – and how they work

Like a whole life insurance policy1, a universal life insurance policy combines wealth-building cash value and life-long coverage. But there’s a fundamental difference compared to whole life: the premiums are flexible2. That may have appeal in an evolving economy, where many people find their incomes to be less stable than they once were. Such flexibility may have traditionally been needed by those working in sales and cyclical industries such as real estate; but nowadays, more and more people – executives, entrepreneurs, sole proprietors, even medical and legal professionals – are finding it harder to predict how much they’ll be making from year to year. The added premium flexibility of universal life insurance may make the advantages of a permanent life insurance policy more attainable.

standard universal life insurance policy allows you to raise or lower your premium payments, within certain limits set by the policy3. These policies can provide guaranteed cash value growth similar to whole life insurance while providing the same kinds of tax deferral, loan collateral, and premium payment benefits; however, minimum premium payments reduce cash value growth and can erode its value, eventually resulting in a need to pay higher premiums in later years to keep your insurance coverage. Policy growth is based on adequate funding, increasing crediting rates, and if costs of insurance is lower than expected. If any of the three factors just mentioned are lower than expected (policy funding and crediting rates), and/or higher than expected (cost of insurance), the policy may lapse. It’s important to work with a financial professional who can explain these factors, as well as answer any questions you may have about universal life insurance. Some people may choose to build cash value by paying maximum premiums for the first several years – then use their cash value as needed to help lower premium costs later on.

Want even more options? Greater cash value growth potential? Potentially lower premiums? There are different kinds of policies to suit your needs.

Indexed universal life

In a standard permanent life insurance policy, cash value is guaranteed to grow at a specified minimum interest rate but can grow faster depending on the insurance company’s performance. In an indexed policy, your cash value isn’t dependent on how the insurance company invests its own money. Rather, it’s tied to the performance of an index such as the S&P 500 Index4, with caps for minimum and maximum rates of return5. So, for example, in a year where the index is up 20%, you may only see a 10%-12% gain. Conversely, if your chosen index is negative for the year, your cash value will stay the same or even grow slightly (depending on the specific terms of the indexed policy). Each insurance company has its own selection of indices available, and you may be able to choose more than one. You may also be able to allocate a portion of your cash value in a fixed-rate interest account.

Variable universal life6

This is similar to an indexed policy, but instead of investing in a broad index like the S&P 500 or Russell 2000, you have the option to tie cash value growth to grouped investment funds. These policies are sold by prospectus and the insurance company gives you the performance history and fee information, and you can decide how much of your cash value to invest in each option. Note that there is typically more risk in a variable policy than an indexed policy – your cash value can actually decrease if the funds you select do poorly.

Guaranteed universal life

This type of life insurance policy, also called GUL, offers little or no cash value or surrender value. Instead of providing cash value growth, this policy is structured to provide permanent coverage with typically lower premiums compared to whole life insurance.

Survivorship universal life 

Survivorship universal life is a product that insures two lives – typically spouses – and pays a death benefit to their heirs at the second death.

How universal life compares to whole and term coverage

Universal life vs. whole life insurance

Both types of policies provide permanent life insurance protection with a cash value investment component that can grow over time, but universal life can offer flexibility to deal with changing life circumstances. You can choose to raise or lower your premium payments within a specific range. With an indexed or variable universal policy, you have the opportunity to help your cash value grow faster. But there are downsides as well: Universal life insurance policies are more complex and need to be managed to ensure that your cash value doesn’t drop below a minimum threshold. Your cash value can stop growing or even decrease if the policy doesn’t perform well. And if you only make minimum premium payments, that can lead to cash value erosion – forcing you to make higher payments later on, lower the death benefit amount or forego your coverage altogether.

Whole life insurance policies are much simpler in comparison, with level premiums and cash growth guarantees7. However, whole life insurance also tends to be more expensive, especially in comparison to GUL, which focuses on providing a death benefit but may not have a cash value component.

Universal life vs. term life insurance

Term life is the simplest form of life insurance protection: With a typical term policy you pay a set monthly premium for 10, 20, or 30 years, and if you pass away during that term, a death benefit is paid to your family. There’s no cash value component and no investing choices to make. The downside is that term is temporary coverage, which can provide limited flexibility to deal with changing life circumstances – typically, the only substantial change you can make after your term policy is in effect is to convert it to a whole life policy.

By contrast, universal life can provide additional financial protection options that can last a lifetime: GUL can provide permanent protection with level premiums; Standard policies can give you the added benefit of potential cash value growth and flexible premiums; Indexed and variable policies add the potential for upside growth tied to indexes and other investments. Also, a universal life insurance policy (like a whole life policy) can provide a number of tax-advantaged estate planning benefits that may not be available with temporary term coverage. 

Universal life compared to whole life and term life



Universal Life Insurance

Whole Life 

Term Life 

Coverage period

Permanent life-long protection

Permanent life-long protection

Limited to a specific term (typically 10-30 years)

Builds cash value




Cost for a given death benefit

More expensive than term; but often less than whole life

More expensive than term

Less expensive than whole life or universal life


Can vary

Typically fixed

Typically fixed

Income Tax-free death benefit

Yes, typically

Yes, typically

Yes, typically

Investment options

Standard – No

Indexed – Yes
Variable – Yes

Guaranteed – NA

Limited, if any


Primary uses

Income protection; tax-advantaged wealth preservation and transfer

Income protection; tax-deferred asset accumulation; tax-advantaged wealth preservation and transfer

Income protection and replacement 


How to buy a universal life policy

Life insurance is one of the most consequential purchases you can make: Even the simplest term policy can be an impotant financial tool that can help protect your family’s financial well-being for decades to come. A universal life policy can provide the flexibility to help you build assets, deal with life’s uncertainties, and even pass on wealth to the next generation. But it’s an inherently complex instrument, and guidance is needed to arrive at the right solution for your needs. If you think this type of insurance policy may be right for you, discuss your situation with a financial professional with experience in helping people get permanent life protection. If you don’t know such a professional, ask a friend or colleague for a recommendation. Or, Guardian can connect you to a financial representative who can help. 

Learn more about how to buy life insurance.

Frequently asked questions about universal life insurance coverage

Why should I consider universal life insurance?

It can be a flexible way to get permanent life insurance protection and build cash value because the premiums are not fixed: you can raise or lower your monthly or yearly payments within certain limits set by the policy. It can be a coverage solution to consider for people with income that varies from year to year.

What is the difference between whole life and universal life?

Universal life can provide many of the same permanent protection and benefits as whole life along with added flexibility. In addition to flexible premiums, some policies let you invest your cash value in a variety of market-based options, giving you the potential for more growth. On the flip side, universal life offers fewer (and/or lower) cash value growth guarantees. You also have to keep an eye on your cash value balance over time: If it goes down to zero, your premiums could go up, or coverage could be canceled.

Is universal life insurance a bad product?

Like other types of financial vehicles, this kind of policy isn’t for everyone. If you want a simple form of permanent life insurance with guarantees for cash value growth, then a whole life policy may be considered. On the other hand, if your income can vary from year to year, and you want permanent life protection with the option of being able to raise or lower your premiums, then a universal life policy could be a consideration. 

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1 Permanent life insurance consists of two types: whole life and universal life. Cash value grows in a participating whole life policy through dividends, which are declared annually by the company's board of directors and are not guaranteed. Cash value grows in a universal life policy through credited interest and decreased insurance costs. The cash value of both policy types benefits when the policyholder pays an amount above the required premium.

2 Universal Life Insurance may lapse prematurely due to inadequate funding (low or no premium), increase in cost of insurance rates as the insured grows older, and a low interest crediting rate. This does not apply to universal life policies which have a secondary guarantee, but if the secondary guarantee requirements are not met the policy will most likely lapse.

3 A Fixed Universal Life Insurance (UL) policy provides a flexible premium, choice of death benefit options, and a guaranteed crediting rate (i.e. 2%). Policy growth is based on adequate funding, increasing crediting rates, and if costs of insurance is lower than expected. If any of the three factors just mentioned are lower than expected (policy funding and crediting rates), and/or higher than expected (cost of insurance), the policy may lapse.

4 S&P 500 Index is a market index generally considered representative of the stock market as a whole. The index focuses on the large-cap segment of the U.S. equities market.

5 An Indexed Universal Life (IUL) policy is not considered a security. Premium and death benefit types are flexible. It’s crediting rate is based on the performance of a stock index with a cap rate (i.e. 10%), a floor (i.e. 0%), and a participation rate (i.e., 100%). This type of universal life policy may lapse due to low or negative performance of the stock index, inadequate funding, and increasing cost of insurance rates

6 A Variable Universal Life (VUL) policy is considered both life insurance and a security and is sold with a prospectus. Premium and death benefit types are flexible. It’s crediting rate is based on the performance of the underlying investment options provided in the policy. There is no guaranteed interest rate. This type of policy may lapse due to low or negative performance of the underlying investment options, inadequate funding, and increasing cost of insurance rates. See your policy prospectus for more information.

7 All whole life insurance policy guarantees are subject to the timely payment of all required premiums and the claims paying ability of the issuing insurance company. Policy loans and withdrawals affect the guarantees by reducing the policy’s death benefit and cash values.

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