Universal life insurance is a form of cash value life insurance. Like whole life, the more traditional variety of cash policy, universal life is two things in one. It provides a set death benefit during the term of the contract. At the same time, the premiums you pay build cash value that you receive in the form of lump sum or monthly payments at the end of the contract—typically when you're ready to retire or die.

However, unlike traditional whole life policies, in which the premiums and death benefit are fixed and guaranteed at the outset of the policy, universal life policies have a very flexible structure. Within certain limits, you can adjust the amount and timing of your premiums as well as the size of the death benefit—each independently of the other. The insurance company invests the part of your premium that doesn't pay for the death benefit and administrative costs into a managed, tax-deferred account paying rates of interest comparable to those of investment-grade bonds. By paying more premiums than necessary to cover the insurance and expense charges, you can greatly enhance your policy's cash value. When there is sufficient cash value to cover the monthly charges, you can even skip premiums.

Because of this flexible structure, universal life policies, in contrast to whole life policies, do not provide a schedule of guaranteed future values; however, they do provide guaranteed maximum charges for insurance and expenses and a guaranteed minimum interest crediting rate.

Another distinction between universal life and whole life is the fact that universal life separates and discloses the components of insurance costs and expenses in addition to the interest crediting rate that both will disclose. The key points to remember about universal life are its flexibility and disclosure of costs. With universal life, you can change the policy as your needs change over time (for instance, as you gain or lose dependents).