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Universal life insurance (UL) is a type of permanent life insurance, meaning it provides lifelong coverage. With adjustable premiums and death benefit, the UL insurance option provides more flexibility than whole life insurance. UL insurance premiums consist of two components: a cost of insurance (COI) amount and a saving component, known as the cash value.

You may be able to withdraw or borrow against the cash value of the insurance once the money has piled up (the amount available varies per company). The regulations governing how and when you may do this differ depending on the insurance provider and policy. However, you should be aware that doing so may lower your death benefit, result in tax implications, or even cause your policy to cease.

In a UL insurance policy, the cash value earns interest and as cash value accumulates, policyholders may use a portion of it without lowering the death benefit. However, it is important to remember that interest rates change with the market, which means the interest you earn may also decrease. Some firms provide insurance against this by providing a policy with a minimum performance guarantee.

Difference Between Universal and Whole Life Insurance

Both universal and whole life insurance are long-term policies that can cover you for the rest of your life. You pay a premium to the life insurance provider in return for protection. There are several distinctions between universal and whole life insurance, though. Your premium with whole life insurance is generally fixed for the duration of the policy, but with universal life insurance, you may be able to change your premium as long as you pay enough to cover the annual insurance cost.

Universal life insurance is typically less expensive when you initially join up, but as you become older, your insurance premiums rise. You must save enough cash value or pay sufficient premiums to match these rising expenses, or you risk losing your coverage. On the other hand, whole life insurance is usually more expensive at first, but the cost does not rise with time.

Finally, whole life insurance has a lower but more consistent cash value increase rate. The insurer usually pays a fixed, partially guaranteed, amount. However, with universal life insurance, your cash value return might fluctuate. The cash value may increase, but it may also decrease up to losing the cash value overall.

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