Explain universal life insurance, how does it differ from whole life insurance?

Universal life is one of the most versatile forms of life insurance available. It is similar to whole life insurance because it stays with you for your entire life and because it carries a cash value that you can access as a financial vehicle. But where whole life insurance has fixed premiums and very little policyholder interaction, a universal life policy allows you to participate to a high degree.

Universal life is also called "Flexible Premium Adjustable Life Insurance," because of the unique way the policy works. Premiums can be flexible, and once you have accrued some cash value you can even use the cash value of the policy to make future premium payments if necessary. The policyholder has several premium payment options: Pay regular premiums, pay flexible premium amounts at your discretion, or set up the policy so that it will pay for itself after a certain amount of cash value has been accrued.

Universal life insurance has two options for the death benefits, as well. The first option is face-value, which means that the policy will pay out the face value of the policy on your death. The second option is the cash value option. In this situation, the benefits that will be paid out are equal to the accrued cash value, and may be higher or lower than the face value of the policy. Note that while the cash value may be much higher due to the return on investment, you are usually guaranteed a minimum payout regardless of how well the investments perform.

Like whole life insurance, the universal life policy allows you to borrow against the accrued value without paying taxes on the loan. Since you are essentially loaning money to yourself, the taxes that would normally be applied to loans do not apply. Whole life and universal life policies both provide this option, acting as special type of tax-deferred savings account.