Universal life features an adjustable interest rate which is paid on the savings portion of the policy contract. This contrasts with the fixed rate paid by a more traditional life product such as ordinary life. Universal life premiums are sometimes not even referred to as “premiums.” Often, these payments are called “contributions.” For example, the policyowner may want to spend more money when interest rates being paid on the savings portion of his or her policy are high. At this time, the individual can contribute more toward his or her policy.
The most distinguishing feature of universal life, as compared with the traditional types of policies, is its variable interest rate. The insurance company pays this variable rate on the savings portion of the policy contract. This interest rate is usually set at specific intervals and is tied to some sort of index.
Since the company is essentially shifting part of the investment risk to the policyholder and the minimum guaranteed rate is usually very low, theoretically the insurer can afford to charge lower premiums because of its lower risk.
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