What is universal life insurance?

Universal life insurance is a type of permanent life insurance that stays in place as long as you continue to pay premiums.

Unlike whole life insurance, an investment savings element and policyholders have the flexibility to change their premiums and death benefits.

Here's what you need to know about universal life insurance to decide if it's right for you.

Though both stay in force for your entire life, a universal life insurance policy offers much more flexibility than whole life insurance, allowing you to adjust your premiums and death benefits as your circumstances change.

Universal life insurance has a cash value component like whole life insurance, but it's tied to interest rates, stock indexes or subaccounts of your choosing. That can allow for greater growth but also requires you to closely monitor your account so it doesn't become underfunded.

Several of our top picks for the best life insurance offer universal life insurance, including Northwestern Mutual and Pacific Life.

As you pay your premiums, a portion accumulates as a cash value component that grows over time. Depending on the type of policy, the cash value component can be invested by the policyholder or the insurance company.

Cash value can be used to pay premiums, take out a loan or even supplement retirement income.

When you die, your beneficiaries receive a set death benefit that is tax-free. In most cases, however, they will not receive any remaining cash value.

Here are the three main types of universal life insurance you'll find.

• Indexed universal life insurance: This type of coverage has investments tied to a stock market index such as the S&P 500. Usually, these investments will have limits on your gains and losses so it doesn't follow the index exactly.
• Variable universal life insurance: This coverage allows you to manage sub-accounts where money is invested in stocks and bonds. If the value of your investments decreases, you could lose cash value in the policy.
• Guaranteed universal life insurance: With this coverage, death benefits and premiums won't change, and you won't earn as much cash value. You'll select an age when the policy ends (generally over age 90). While it's one of the cheaper forms of universal life insurance, it could lapse if you miss even one payment.

The type of life insurance that's right for you will depend on your budget, how much you want to manage your investments and your coverage needs.

Keep these in mind if you're considering a universal life insurance policy.

Benefits

• Coverage won't expire like a term policy.
• Has a cash value component that can pay for coverage or be borrowed against
• Premiums are flexible, so you can adjust as your income lowers in retirement.
• Death benefits are flexible, so the amount can be adjusted as your needs change.
• Cash value grows tax-deferred and death benefits are generally tax-free.

Drawbacks

• More expensive premiums than term life insurance.
• Building cash value is not guaranteed
• Fees can be high, especially for variable universal life insurance.
• Policies can be complicated and you may need to invest and track the money you put in

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