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The Difference Between Universal Life and Variable Universal Life Insurance

Universal life and variable universal life insurance are two types of permanent life insurance plans that contain a cash value component, last the entirety of your life and provide a death benefit to your loved ones when you pass away. There are a few key similarities and differences between universal life and variable universal life insurance.

Universal Life Insurance

Universal life insurance, also known as UL insurance, is a type of permanent life insurance that offers an investment savings component and low premiums that are similar to term life insurance products. Universal life insurance has a cash value component that earns interest that can be applied toward your premium payments. You can also change your premium payments and death benefit at any time during the policy as long as you’re current on the account. When you pass away, the policy pays out a tax-free cash amount to your beneficiaries. 

Variable Universal Life Insurance

Variable universal life insurance, also referred to as VUL, comes with diverse investment choices and a built-in savings element that allows policyholders to invest the cash value of the account. Premiums for variable universal life insurance fund a cash value amount and death benefits for your beneficiaries. Policyholders have a pool of investor funds offered by the insurer from which to choose, including stocks, bonds and mutual funds. 

This type of life insurance plan gets its name from the varying results of investment in a changing market, which can generate significant returns or substantial losses. Variable universal life insurance policies are generally more expensive and complicated than other types of plans. 

Comparing Universal and Variable Universal Life Insurance Policies

Universal and variable universal life insurance policies have several similarities in how they're designed and what benefits they offer: 

  • Guaranteed death benefit: Both UL and VUL policies provide a guaranteed death benefit to your loved ones when you die. 
  • Duration: Both UL and VUL plans last the entirety of the policyholder’s life. 
  • Cash value: For both UL and VUL policies, the cash value is protected from significant risk and can be used to pay premiums.  

There are key differences between universal life insurance and variable universal life insurance, however.

  • Premiums: Universal life insurance premiums vary and can adjust according to the policyholder. For example, your policy has a minimum premium due to keep it in force, so any gains you have from this account can be used to pay premiums. If your cash value is high enough, you can even skip premium payments altogether. 
  • Cash value growth: Both types of policies differ in how funds are invested. Interest rates for universal life insurance policies are unpredictable. The policy comes with a minimum interest rate, but that can change depending on the market. 

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