How Does Universal Life Insurance Work? 
I 'll add a bit to what Jeff has said because he made a very important point about Universal Life , that it 's a hybrid of whole life and term . Both whole life and Universal Life build cash value and have a separate portion that 's purely death benefit , but they differ greatly in how they operate internally . I 'll follow with explaining this difference . I 'm going to speak somewhat generally , so do n't kill me if a particular company 's product behaves a little differently . Whole Life - The internal cost of insurance is averaged over your life expectancy and stays the same year after year . Therefore , every year , the same amount of money goes toward the cost of insurance . The remainder goes to the cash account which grows by the insurance company adding money , or dividends , to the account . These dividends are set by the company based on the performance of it 's investments . It can change every year but most companies will guarantee a certain dividend . Premiums are level throughout the life of the policy and , if you pay your premium , your policy is guaranteed to be there for you . Universal Life - The internal cost of insurance increases every year based on your age just like term insurance does . The remainder goes into a cash account that the insurance company adds to as interest . This interest rate is also tied to the performance of their investments and will change from year to year . This means that , at the beginning of the policy , the internal cost of insurance is the lowest it will ever be and will increase every year . Premiums are flexible with a minimum amount due to cover expenses and the cost of insurance . Remainder goes into the cash account . There good and bad with both . With Whole life , your premiums will usually start out higher than with Universal , but they 'll never change and your policy is guaranteed to be there as long as you pay the premium . With Universal Life , the minimum premium will be much lower at inception but will increase every year as the cost insurance rises . This makes it extremely important to pay a target premium or more with universal life . That way , more money goes into the cash account to earn interest and offset cost of insurance increases as you get older . You can put more into the cash account and , therefore , it can grow more quickly , but there 's a flip side to that also . if you underfund it , the increasing cost of insurance can eat up all the cash value in later years and leave you with no cash and no death benefit . Be smart . Find an agent you can trust and go through the entire process so he/she can put together the right program for you and your family . 