Universal life insurance is a type of permanent life insurance that builds cash value and this cash value is credited each month with an interest. The interest rate is determined by the insurer or is linked to a financial index. However the policy is debited each month with the cost of insurance, any fees and other applicable charges. A universal life insurance policy differs from a term insurance policy in that it stays in force as long as the premiums are paid.

• A big benefit of universal life insurance is that the cash value that builds up is tax deferred. If the policy remains in force till death then the cash value becomes completely tax free. Universal life insurance is similar to variable life insurance in which the funds are allocated to separate accounts which operate like a mutual fund and used for high risk investments such as in stocks and bonds.
• Universal life insurance is similar to and developed from whole life insurance; however whole life insurance does not provide the lucrative interest rates offered by universal life insurance policy. Moreover universal life insurance also has the benefit of increased flexibility of premiums compared to those in a whole life insurance policy. Another advantage of a universal life insurance policy is that the death benefit can be increased or decreased without surrendering the policy as is the case with a whole life insurance policy.
• Many universal life insurance policies come with the option of taking out a loan and the insurance company charges an interest on this loan. The principal of the loan is not required to be repaid; however the interest is required to be paid. If the insured person does not pay the interest on the loan then it will be deducted from the cash value. If there is not enough cash value or funds in the policy then the policy will lapse.
• Instead of taking out a loan a withdrawal is also possible but will reduce the death benefit of the insured party. The withdrawal is considered a material transaction and can change the policy to a Modified Endowment Contract (MEC). This will render the policy into a non tax advantageous one and will no longer serve the purpose of tax deferral or advantage. Broadly speaking there are three types of universal life policies – single premium policies, fixed premium policies and flexible premium policies.
• Fixed premium policies: These are policies that require premiums to be paid for only a fixed period of time. After this period the policy is considered paid up and remains in force without requiring any premiums. However fixed premium policies may also mean those contracts that require a fixed premium for the entire length of the policy. However this only works if it is tied to a guarantee; if the guarantee is lost then the policy again becomes one which requires flexible payments.
• Single premium policies: These are the ones in which the insured has to pay only a single premium to keep the policy in force. These were very popular prior to 1988 however due to some changes in tax code have become less tax advantageous. Now these policies become modified endowment policies and lose their tax benefit if any material changes are made in the policy rendering them less tax advantageous.
• Flexible premium policies: Universal life insurance policies are inherently flexible premium policies. However the flexibility is usually only available within certain limits. If the cash value diminishes due to missed or smaller payments then the insured may have to shell out bigger premiums in the future to keep the policy in force. However, the policy usually offers many types of death benefits; most common being level death benefit and increasing death benefit.

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