Understanding How Guaranteed Universal Life Insurance (GUL) Works

Thang Truong
Thang Truong
Updated on:

As a permanent life insurance with flexible premium payments, Guaranteed Universal Life Insurance (GUL) offers policyholders convenience in a permanent life insurance policy. These policies are a newer type of insurance offered to people who want insurance coverage for a whole lifetime, but they can’t handle the inflexible nature of a whole life insurance policy. Let’s see what a GUL is all about.

How does Guaranteed Universal Life Insurance Work?

A guaranteed universal life insurance (GUL) is a kind of universal life insurance policy with the addition of a no-lapse guarantee that keeps the policy active if your cash surrender value falls to zero or less. The guarantee will provide protection for the entire life of the policy, 121 years maximum. However, it is most important during the first twenty years of a GUL when surrender charges are the largest and can keep the surrender value of the policy at or below zero. Surrender charges are potential administrative fees that may be taken out if a policy holder cancels their policy. They are usually deducted from the potential cash value increase for each year for the first 20 years.

This standard coverage guarantee does come with a few caveats, so your insurance agent will need to be very clear on what kinds of conditions may put this guarantee at risk.

A standard Guaranteed Protection UL from Penn Mutual requires the following conditions be met to keep the no-lapse guarantee active:

  • Total premiums paid, minus the partial withdrawals, must meet the no-lapse guarantee amount.
  • There are no outstanding loans at the time the cash surrender value falls to zero.
  • Policy changes might affect the guarantee or length of time the guarantee is good.

Essentially, you’ll need to make sure your premium payments are high enough to meet your policy’s minimum requirement and that you don’t overdraw the cash value. 

Your insurance agent will help you establish a payment schedule that meets these requirements even with the bare minimum premium payments.

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Cash Value Accumulation in a Guaranteed Universal Life Insurance Policy

These policies aren’t designed to provide retirement income, though they do offer cash value accumulation. The guaranteed rate for accumulation is usually about 2%, which won’t earn a lot of money for policyholders. However, the cash value component of the policy can reach a modest amount over the course of a decade or more. This way policyholders can rely on the cash value for premium payments, or emergency loans and partial withdrawals.

>>MORE: Is Guaranteed Universal Life Insurance Worth It?

Case Study of Guaranteed Universal Life Insurance

Despite the built-in flexibility of a GUL, policyholders may find that their policy winds up being a very stable product with few changes in the long-term. This is especially true of those who make consistent payments of at least the minimum premium each year. To better show you what we mean, we’ve pulled the illustration for a man who is 30 years old and living in California. He is healthy and wants to get a GUL policy with a death benefit of $500,000. He wants to pay a premium for 30 years only, from 30 to 60 years old. 

His initial annual premiums are $3,016.00.

Here we’ll show how the cash-value accumulates slowly over those 30 years, and later, how it decreases as he stops paying premiums, yet still has permanent coverage of $500,000 when he passes away.

Policy Age (Years)Premium PaymentCash Policy Value Cash Surrender Value
20$3,016.00.$15,412 15,412 
25$3,016.00.$23,377 23,377
30$3,016.00.$29,248 29,248

The above table only looks at 70 years of the GULs policy life. However, it could potentially remain valid for as long as 121 years of age. The policyholder appears to pay his minimum premium amount for the first 30 years at which point the insurance policy is considered ‘paid-up.’ During this time the policyholder will have paid out $90,480. 

As you can see the cash value and surrender value are both zero for the first 10 years during the time when the potential surrender charges applied would be at their highest. However, these charges shrink to nothing within 20 years. By the end of 10 years, they are low enough that the policy starts to earn some cash-value. 

After 30 years of payments the policy becomes paid-up, so the policyholder isn’t expected to make any more cash payments to keep the GUL insurance in force until the policy holder reaches 121 years old.

The policy remains in force because the premium payments are now paid in full. The no-lapse guarantee has done its job for the policyholder. 

Thanks to the level death benefit he established and didn’t mess with during the lifetime of the policy, this man will still have $500,000 in death benefits to give his loved ones.

>>MORE: Compare Guaranteed Universal Life Insurance with Whole Life Insurance

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Why is GUL Policy is Much Cheaper than Whole Life Policy Offering the Same Benefits?

A guaranteed universal life insurance policy does not offer the same level of cash value accumulation as say a whole life insurance policy. It does offer guaranteed protection and a low premium payment. For instance, a similar dividend paying whole life insurance policy by PennMutual would cost about $6,096.96 per year versus the $3,016.00 per year for this guaranteed universal life insurance policy. 

The low cash accumulation at just 2% per year is part of the reason why the GUL is so much less expensive. While both have the same death benefit, the whole life policy could potentially end up paying out more thanks to the possibility of annual dividends, which is used to buy additional insurance coverage.

If you are looking for a decent life insurance policy that will leave guaranteed benefits at an affordable rate, the GUL is a good choice.

Thang Truong

Thang Truong covers small business insurance and small business success at BravoPolicy. He is a licensed P&C insurance agent. Previously, he held product leadership positions at realtor.com, Capital One, NerdWallet, and Mulberry Technology. He holds a MBA degree from UC Berkeley - Haas School of Business.

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