Universal life insurance is a mixture of term insurance and a savings account. Basically the policy holder pays an annual fee for life insurance coverage and the policy earns interest at the money market rate.

The premium is not fixed and can float up or down. The policy holder decides how much should go towards insurance and how much toward savings. All other things are changeable, e.g. the face value of the policy, the amount of premium payments and the payment periods.
The insured must make sure that their savings are large enough to cover the monthly premiums for the insurance as well as the policy expenses. If the savings are not large enough, the monthly charges will consume the cash value and the policy will be of no value.

Universal life insurance offers two options:
o Keeping the death benefits the same from year to year if the policy holder does not request any changes.
o Having the death benefit at any time stay equal to the original face value in addition to the policy's cash worth.

The interest rates on universal life insurance may rise as inflation rises, even if the insuring company guarantees a low rate. To counteract this risk, premiums are lower for whole life insurance but more expensive for term insurance for younger individuals. Also, when the price for managing the policy is added to the premium, the policy holder will receive a lower return on their investment. Remember that changes in interest rates will affect both a policy holder's yields and his premiums.

Variable Life Insurance
This is a type of permanent life insurance that allows the policy holder to target their premium to one or more detached investment funds. These funds can be fixed income investments, stocks, bonds, or money market funds. The policy holder can typically change their investments from two to five times annually. Unlike universal life insurance, the insured can manage the investment of their cash value.

However, the policy can be risky because the investment has the ability to rise or fall. The cash value and investment will differ, depending on what the investment fund does. The death benefit cannot fall below the total amount of life insurance originally purchased.

As with traditional whole life insurance, the policy holder pays fixed premiums and can borrow against the policy at either fixed or variable rates.