Universal life insurance is most closely related to whole life insurance. The major difference is that a universal policy distinguishes and itemizes three different elements: the protection element, the expense element, and the cash value element. When a person opts for a universal life insurance policy, the insurance company has a little more flexibility in terms of building that policy.

In other words, the policy owner can modify the face amount or the premium in response to changes in his or her own personal needs and circumstances. Of course there are guidelines to be followed that keep such changes in check. Let's take a look at how the universal life insurance policy works.

How the Universal Life Insurance Policy Works

When a person purchases a universal policy, premiums are credited to the policy as the owner pays them. Every month, the insurance company to cover the costs of the death benefits, in addition to any riders or supplemental benefits, deducts a certain amount of money from the policy value. Furthermore, interest is credited to the policy based upon the current declared interest rate and the cash value of the policy. Again, the insurance company, not the policyholder, makes this determination.

The interest rate will change over time, which can affect the amount credited to the policy. If the policy is surrendered early, the cash value will be less. In other words, the surrender value is the cash value minus any applicable charges. You can speak with your insurance agent further if you are not clear whether or not a universal life insurance plan would best suit your needs.