What is universal life insurance?

You pay premiums into the policy, and the insurer takes out the cost of insurance plus fees, with the remainder building cash value that earns interest. Because the structure is transparent, you can see exactly where your money goes.

Within limits, you can raise or lower your premium, change the death benefit, or use accumulated cash value to cover premiums. This flexibility is the main difference from whole life, which has fixed premiums.

Whole life guarantees a fixed premium, a guaranteed cash value growth rate, and a guaranteed death benefit. Universal life offers flexible premiums but its cash value growth depends partly on current interest rates, so it can underperform if rates fall.

Universal life suits people who want permanent coverage with the ability to adjust payments, such as business owners or those with fluctuating income. Whole life is the choice when guaranteed, predictable premiums matter most.

If interest rates drop and you pay the minimum premium, a universal policy can lapse if the cash value runs out. Reviewing the policy's illustrations and funding it adequately helps keep coverage in force. Indexed and variable universal policies add market or index exposure and more risk.