Universal life insurance policies build a "cash value," depending on the amount the policyholder pays into the policy each premium period and the fluctuating interest rate the policy earns.
Universal life insurance policies are very expensive compared to term insurance, typically paying the broker a commission of 70-90% on the first year's premium and as much as 5-10% on each subsequent year's premium.
The recommendation to use universal life insurance as a college savings vehicle arises primarily from the fact that insurance policies are not counted as assets on the FAFSA form or as part of the Expected Family Contribution.
This leads many parents to falsely believe that an insurance policy will help them to qualify for substantially more financial aid than they would by using other accounts such as a Section 529 plan. In reality, the costs (including surrender chargers) associated with a universal life insurance policy can quickly outweigh the small gains received in financial aid (if any).
Variable universal life insurance (VUL), which is often marketed as a higher performing investment than standard universal life insurance, gives the insured the opportunity to invest in stocks rather than in a fixed rate account.