02 May What’s the difference between universal and variable life insurance?

Q. What’s the difference between universal and variable life insurance?
— Unsure

A. We’re glad you’re asking.

There are many different types of life insurance, and it can get confusing.

The two on the most opposite ends of the spectrum are term and pure whole life, said Ed Gaelick, a Chartered Life Underwriter and Chartered Financial Consultant with PSI Consultants in Glen Rock.

Term is death benefit only, he said. There’s no value unless you die and premiums are lowest at young ages and increase with age, he said.

Pure whole life has guaranteed premiums, benefits for life and builds cash value, so you would have a living benefit as well as a permanent protection, he said.

“The premium difference between these two products is quite wide so the life insurance industry created universal life, where premiums were somewhere in between term and whole life,” Gaelick said. “This was attractive to many since it was promoted as being permanent.”

He said notably, it was created in the late 1970s when interest rates were 15 to 20%.

“The product is built on a term chassis and the difference between the premium and the term insurance cost is invested into a money market or some type of cash account,” he said. “So with interest rates in double digits, the product worked real well, until interest rates came down.”

The policy’s insurance cost also increased each year and eventually exceeded the established premium, Gaelick said.

“So the cash accumulation was used to pay any difference in insurance cost and at the point of being completely used, the insureds would get a notice that their premiums were increasing and all the cash value was gone,” he said.

That led to the introduction of a new product: variable life.

“It’s the exact same principle as universal except the difference in term cost and premium is invested in equities or mutual funds, which were very popular then,” Gaelick said. “So the trade off was interest risk for market risk.”

Either way, he said, internal insurance costs increase as the insured ages, exposing the insured to declines in cash accumulation and possibly increases in premiums in their later years.

These products have their place and can be an appropriate option, but it’s always wise to consult a professional to analyze your specific situation to determine which product makes the most sense for you.

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This story was originally published on May 2, 2023.

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