Universal life insurance is a type of permanent life insurance with the unique feature that any premium payments larger than the actual cost of insurance are credited to the cash value of the policy. The cash value accumulates and is credited each month with interest and debited each month by the cost of insurance. If no premium is paid for a particular month, it will be drawn from the cash value. The insurer determines the rate of interest that the cash value will earn; this is often tied to a financial index. This makes for a stable investment option.

The most pronounced difference between a universal life insurance policy and a whole life insurance policy is that the universal life policy transfers some of the risk to the policy holder. If the cash value or premiums paid are not enough to cover the cost of the insurance, a universal life insurance policy will terminate and the death benefit will no longer be in effect. In contrast, if every premium payment is paid in a whole life insurance policy, the death benefit is guaranteed and will be paid when the insured dies.

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