Universal life insurance contracts differ from traditional whole life policies by separating the “protection element”, the “expense element” and the “cash value element.” Dividing the policy into these three components allows the insurance company to build a higher degree of flexibility into the contract. This flexibility allows (within certain guidelines) the policy owner to modify the policy face amount or premium in response to changing needs and circumstances. | |  |  | | The “cash value element” accumulates on a tax-deferred basis. Withdrawals from the “cash value element” can be income tax-free if structured properly. |
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A monthly charge for both the “protection element” and the “expense element” is deducted from the policy's account balance. The remainder of the premium is allocated to the “cash value element.” Because of these internal charges against the “cash value element” of the policy (and unlike traditional whole life policies), complete disclosure of the charge is provided to policyholders in the form of an annual statement. Tax-deferred accumulation and a potentially non-taxable payout make life insurance a very strong financial tool. Universal life provides the policy owner with greater flexibility and higher yield potential than traditional whole life policies. | 
