Universal life insurance is a variant of a whole life insurance policy that incorporates both traditional life insurance with a cash value aspect, where the policy accumulates money above the death benefit. This money can be used by the owner of the policy prior to the person’s death.
The cash value accumulates on the amount of premiums paid above what is needed to handle the death benefits for the insurance company, The rest accumulates. This money can be invested in various ways, depending on your policy, such as a fixed rate, pegged to an index, such as the stock market, or several other methods. After 15 years, minimum, this accumulated excess value can be used by the insured and borrowed against, or perhaps even used to pay the premiums on the insurance policy itself. If the policy is surrendered, the insurance company will pay you for the cash value in your policy.
One of the advantages of this type of policy is that it serves many tax advantages, similar to a Roth IRA. Your money can be withdrawn, using certain methods that fall within strict IRS regulations and guidelines, tax free, by using he money as collateral for a loan by the insurance company or by only taking out the premiums paid in, for example.
These are controversial “investments” and cannot be sold as investments, but are sold as insurance. The cash value accumulated is your money that you have paid, it is not a gift. Compare different plans and options before going with either. For most people who are using life insurance as a way to protect their family, a term life insurance policy will suffice and be much less expensive on a month by month basis. Agents prefer to push Universal life and whole life policies as the commissions are much higher, but make sure you are informed about how much you are paying and what you are getting for it.
Universal life, as with all whole life policies, should only be used if you plan to keep the policy forever. The premiums are WAY higher than they are for a term insurance for people younger than 50 or even 60 and 70. If you do find yourself with this type of policy later in life, and no longer want to maintain it, you should look in to a life settlement as opposed to surrendering it. Do not let it expire.