Universal life is a type of whole life insurance. It is a mix between term insurance and a savings fund, and it earns interest at a money market rate. You pay a yearly fee for this insurance coverage, which includes a cost of managing the policy. Funds not paying for insurance earn tax-deferred interest.

With a universal life policy, the premium can vary. You decide how much to pay toward insurance and toward savings. You can change the face amount of the policy, or change the amount of premium payments and how often you pay them. However, you must be sure your savings are enough to cover the monthly premiums for insurance and policy expenses. If they are not, the monthly charges will use up the cash value and your policy will be worthless.

Universal life insurance has two options. Option A: the death benefits stay the same from year to year if you do not ask for any changes. Option B: the death benefit at any time is equal to the original face amount plus the policy's cash value.

Universal life often gives a high interest rate when inflation is high, even though the insuring company only guarantees a low rate. Due to this risk, premiums are lower than for whole life insurance but more than for term insurance for younger people. Also, when the charges for managing the policy are added to the premium, you get a lower return on your investment. Remember, changes in interest rates will affect both your yields and your premiums.

Advantages of universal life include that the savings part of the policy usually grows at a faster, higher rate than the cash value of whole life. Your protection under universal remains level while your savings do increase. Earned interest on savings is tax-deferred. For a service charge, you can make partial withdrawals from the savings, and interest paid to borrow from your savings is minimal.

The flexible premium and flexible death benefit in universal life allows you to change your policy as your financial needs change.

The target premiums which you must deposit to realize savings growth and to cover the cost of the term insurance are based not on a minimum guaranteed rate, but on projected interest return. So if interest rates drop, you may have to pay more in premiums to maintain your policy than what you had originally thought. Initial fees and charges mean your savings grow very slowly for the first 10 years of the policy. Always look at the policy's surrender value rather than the stated account value. Term insurance costs more when included in a universal life policy than if purchased alone.