Variable and universal life insurance are both types of permanent life insurance that last for life and include a cash value component. However, the cash value in variable life insurance has investment options and works like a mutual fund. Meanwhile, the cash value in universal life insurance grows based on the interest rate set by the insurer.
When choosing between variable and universal life insurance, the policy you should get depends on your investment needs. Talk to a certified financial planner to help you determine which policy fits into your financial strategy.
Comparing variable life insurance & universal life insurance
The chart below shows how variable life insurance and universal life insurance differ:
Policy details | Variable life insurance | Universal life insurance |
---|---|---|
Duration | Life | Life |
Guaranteed death benefit | Yes | Yes |
Guaranteed cash value | No | Protected from risk, but can be depleted to pay premiums |
How cash grows (or shrinks) | Sub-accounts — pool of investor funds offered by insurer | Fixed interest rate |
Premiums | Level | Varies, up to the customer (subject to federal tax laws) |
Similarities between variable life insurance & universal life insurance
Variable life insurance and universal life insurance are similar in a few key ways:
They both last for life. The most prominent shared aspect of variable and universal life insurance is that they’re both permanent life insurance policies.
They both have a guaranteed death benefit. A guaranteed death benefit is a key feature of a life insurance policy, and both variable and universal policies offer that.
They both have a cash value. The other shared component of all permanent life insurance policies is called the cash value, and the cash value in both universal and variable life insurance grows tax-deferred.
Differences between variable life insurance & universal life insurance
As mentioned, variable life insurance and universal life insurance differ in how the cash value is used.
The cash value grows differently. Universal life insurance has unpredictable interest rates that change based on the market. Variable life insurance has more predictable rates because you choose which sub-accounts grow your cash value.
Universal life has flexible premium payments. Universal life insurance is unique because you can use the cash value growth toward premium payments. If you have enough cash value growth, you may not need to pay any premiums at all.
Which policy should you get?
If you’re choosing between a variable or universal life insurance policy, talking to a certified financial planner about what works best for your financial strategy is very important. Even though they both have a cash value component, they grow differently and the policy you decide on will impact your financial portfolio.
You also don’t have as much control over your investments in a cash value life insurance policy as you would with traditional investments, like stocks and mutual funds. These options should really only be utilized if you have maxed out other investments. Most people should simply get a traditional term life insurance policy and invest the difference.