Universal Life works very similar to Whole Life. The major difference is that the cost of insurance is based on your age. Each year that you own the policy the cost goes up based upon your being one year older. When you first purchase a Universal Life Policy, the cost of insurance inside the plan would be cheaper that the cost of Whole Life Insurance. This would leave more money in the early years to go into the cash value account to earn interest. However, as you get older, the cost of insurance goes up.

The concept of Universal Life is that if you buy when you’re younger and have a greater amount of your premium going into the cash bucket, it will accelerate the growth of your cash value and provide more money to help cover the cost of increasing insurance at older ages.

The cash values in Universal Life policies can differ depending upon the contract. Some policies offer fixed interest rates and the crediting works very much the same way as with Whole Life. Then there are contract that provide for the crediting of interest based upon the performance of a stock market index, usually the S & P 500.

Universal Life is a permanent insurance and will last the rest of your life provided that the cash value never drops to zero. Should your cash value hit zero, you would have to make higher premium payments to keep your policy in force. However, these policies are designed so that as long as you make your premium payments, it should never be in danger of lapsing.

Like Whole Life policies, at some point you should be able to use the cash value to pay the premiums on the policy. Universal Life policies can also be used to provide a supplemental retirement as I described in the Whole Life information.