- Universal life combines a life insurance element with a savings plan. A portion of the premium pays for the insurance costs and fees, while the rest goes into a cash accumulation fund that earns interest on a tax-deferred basis. The interest rate is flexible and is based on the performance of the insurance company's investments. The interest rate cannot fall below a certain threshold, which is typically 4 percent.
- Policyholders usually have flexibility as to the amount of premiums they pay. They can also adjust the amount of the death benefit as their needs change. For example, once the children grow and leave the household, the need for life insurance may decrease, so the amount of insurance they carry may also be reduced.
- Universal life offers a choice of two death benefits. With Option A, the amount of death benefit received by the beneficiaries is paid out of the accumulated cash fund. With Option B, the beneficiaries receive the cash fund plus the amount of the policy's face value. Because Option B pays a larger benefit, it is usually more expensive than Option A.
- With universal life, you have access to the accumulated cash value of your policy. This can be taken as a straight withdrawal that doesn't have to be repaid, or in the form of a loan. You can also surrender the policy and take the cash value minus any surrender costs, although this method will terminate your insurance coverage.
- Although the policyholder has flexibility in the amount of premiums that are paid, the policy theoretically could lapse if he doesn't make enough premium payments over time. To prevent this from happening, some insurance companies now offer a feature that guarantees that as long as a minimum premium payment continues to be made, the policy will never lapse.
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