Universal Life Insurance

Like whole life insurance, universal life provides lifelong cover as long as the policy remains in force. Its distinguishing feature is flexibility. Policyholders can pay more or less in premiums, within limits, and the cash value grows based on an interest rate credited by the insurer, which can change over time.

Each month, the insurer deducts the cost of insurance and fees from the cash value. If premiums and interest are not enough to cover these charges, the cash value falls, and the policy can lapse if it runs out.

For example, a policyholder might pay higher premiums during their working years to build cash value, then reduce or stop payments later, using the cash value to cover the costs.

Variations include indexed universal life, where interest credited is linked to a stock index with limits, and variable universal life, where the cash value is invested in funds chosen by the policyholder. Universal life policies can be complex, and rising insurance costs with age or lower interest rates than expected can cause policies to lapse.