Universal life insurance

Universal life (UL) is a type of permanent life insurance, introduced in the U.S. around 1980, that separates the policy into visible parts: premiums go into an account value, the insurer credits interest, and each month it deducts the cost of insurance and other charges. As long as the account can cover those deductions, the policy stays in force.

That design gives owners flexibility. Within limits, you can pay more, less or nothing in a given year, raise or lower the death benefit (increases usually need underwriting), and choose a level death benefit (option A) or one that includes the account value (option B). Variations include current-assumption UL, which credits a declared rate; indexed UL, tied to a market index; variable UL, invested in subaccounts; and guaranteed UL, built around a secondary guarantee. Hypothetically, if your account holds $40,000, monthly charges are $300 and you stop paying premiums, the account would last about 11 years at zero interest, and less as charges rise with age.

The flexibility cuts both ways. The cost of insurance rises as you age, and falling crediting rates have caused many policies to underperform their original illustrations. Review in-force illustrations regularly. See how universal life insurance works and why universal life policies lapse, and how to prevent it.