Universal life insurance has a cash value, just like a whole life insurance policy. Your premiums go toward both the cash value and the death benefit.
But there’s a twist: You can change the premium and death benefit amounts without getting a new policy.
Basically, although you have a minimum premium to keep the policy in force, you can use the cash value to pay that premium. That means if you have enough money in the cash value, you can use that to skip premium payments entirely, letting the accrued interest do the work. But the cash value of a universal life insurance policy has an interest rate that’s sensitive to current market interest rates. If the interest rate being credited to your policy decreases to the minimum rate, your premium would have to increase to offset the reduced cash value.
You can also adjust the death benefit within limits outlined in your policy. Increasing it may subject you to further underwriting, while there may be fees to decrease it.
If your financial situation changes, the ability to change the death benefit amount within your policy is appealing. While this can be done with term life insurance policies, this feature is one of the main selling points of a universal policy.
This flexibility makes universal life insurance attractive to some people, but it’s also confusing. Unlike term life insurance, where you pay a certain amount every month or year and know what the death benefit will be, shifting premiums and death benefits are more complex than what most people need, and it comes at an added cost.