Universal Life

Universal Life differs from traditional whole life policies by specifically separating and identifying the "mortality", "expense", and "cash value" parts of a policy. Dividing the policy into these three components allows the insurance company to build a higher degree of flexibility into the contract. This flexibility allows (within certain limits) the policy owner to modify the policy face amount or premium, in response to changing needs and circumstances. A monthly charge for both the "mortality" element and the "expense" element is deducted from the policy's account balance. The remainder of the premium is allocated to the "cash value" element, where the funds earn interest. 

Variations of universal life policies include versions with fixed interest rate, and interest rates tied to a stock market index. The latter version is commonly called "indexed universal life." Universal life policies are best suited for long-term obligations or sinking-fund needs where a certain degree of flexibility is needed: estate growth, estate liquidity, death taxes, and funding retirement needs.