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Universal Life - One of the problems with whole life is its rigid premium payment requirements. Lapse one payment and you may lose your policy (of course your cash value is returned to you, but that may not be much during the first years of the policy). A universal policy addresses this concern by adding flexibility to this model. A universal life policy normally spells out the breakdown of the premiums, so the policyholder is always aware of how much of the premium is paid towards the mortality coverage and how much is invested. The premise of universal life is that as long as the mortality side is paid for, the policy remains in force even if the cash value side is used to cover the mortality premium. This gives the policyholders the flexibility to contribute more during good years and less or none during bad years without the fear of losing coverage. Or if they are not impressed with the returns on their cash value portion, they can still keep the policy going as long as they cover the mortality side. And if they are impressed with the returns, they could pay more into the policy which adds more to their cash value. Other than that universal life works the same way as whole life.

Variable Universal Life - With the bull market being in charge for the past several years producing very good returns, many have questioned the wisdom of having whole or universal life policies considering that the savings portion (cash value) is normally invested in fixed-income instruments (e.g., money market) with meager returns (3%-4%). People may ask why not just have term life policies (which have lower premiums than their whole life or universal life counterparts) and invest the extra cash in stocks or mutual funds separately? To address this concern, insurance companies created variable universal life. A variable universal life works the same as the universal life with the exception that the policyholder is now also an investor who can invest the cash value in a number of different instruments ranging from stocks to bonds to mutual funds in any desired portions. All returns continue to be tax-deferred while the …