Universal life insurance is a type of life insurance that lasts for the life of the insured and has flexible premiums, death benefits, and cash value. Universal life insurance operates similarly to whole life insurance in that the insured keeps coverage as long as they pay their premiums and has a tax-deferred investment part of the account. Also, both types of life insurance allow the insured to surrender the account for its cash value and borrow against the account. However, unlike whole life insurance, universal life insurance does not have a guaranteed return for the investment account, set premiums, or maybe even death benefit. Universal life insurance allows a lot of flexibility for the insured and insurer to change the policies. An individual may choose this kind of policy because the cash value of the account may have a higher return than other policies, but given the lack of guaranteed return and potential increased premiums, the policies come with more risk.
Confusion and litigation often arise with universal life insurance regarding when a policy will lapse in case the policy owner does not pay enough to cover minimum premiums and the cash value of the account does not cover the rest. Sometimes policies will contain a guarantee that the policy will not lapse for so many years if a certain amount is paid periodically. Given the wide variety of policies and the changing premiums, individuals should pay attention to the details of their policies, and insurers must follow notification requirements of state and federal regulators.
[Last updated in April of 2022 by the Wex Definitions Team]