Whole Life vs. Universal Life Insurance

These two types of life insurance are both classified as permanent life insurance. Permanent policies provide lifetime coverage, as opposed to term insurance, which guarantees a death benefit payout for a set period of time. If you cancel your permanent life insurance policy, you will receive the cash value of the policy (minus any fees).

These types of life insurance policies are typically divided into two parts: a savings or investment component and an insurance component. As a result, the premiums are higher than for term policies. Policyholders can also borrow against the policy's cash value. As a result, permanent life insurance is also referred to as cash-value insurance.

While they are similar in some ways, whole life and universal life insurance policies differ significantly. With fixed premiums and guaranteed cash value accumulation, whole life insurance provides consistency. Universal life insurance (UL) allows customers to customize their premium payments, death benefits, and savings components. We'll delve deeper into each of these types in this section.

Whole Life Insurance

Whole life insurance protects you for the rest of your life, no matter how long you live. When you die, your beneficiaries will receive the death benefit as long as you continue to pay the premiums. This policy is ideal for long-term responsibilities such as the care of a dependent adult child or post-death expenses such as estate taxes.

How Whole Life Insurance Works

One of the benefits of this type of life insurance is that it provides both coverage and savings. Part of your premium payments are deposited by your insurance company into a high-interest bank account or investment account. Your cash value grows with each premium payment. This savings component of your policy grows your cash value tax-deferred. Whole life insurance is designed to meet an individual's long-term goals, and it is critical to keep it in force for as long as you live.

Pros and Cons of Whole Life Insurance

The guaranteed cash value is one appealing feature of whole life policies. Because you can borrow against it or surrender it for cash, it provides some financial flexibility in the event of an emergency.

Your company's dividends also provide you with some flexibility. You can choose to receive them in cash each year, let them accumulate interest, or use them to lower your policy's premiums or purchase additional coverage.

However, the policy's level premiums, fixed death benefits, and appealing living benefits (such as loans and dividends) make it quite expensive, especially when compared to term insurance. To be able to afford whole life insurance in the long run, it is best to purchase it when you are younger.

Universal Life Insurance

Because of the flexibility it provides, universal life insurance is also known as adjustable life insurance. Once there is money in the account, you can reduce or increase your death benefit and pay your premiums in any amount (subject to certain limits).

How Universal Life Insurance Works

When you make a payment to your universal life insurance policy, a portion of it is invested, and any interest earned is credited to your account. The interest you earn grows tax-free, increasing the cash value of your account.

When necessary, you can adjust the death benefit, increasing it (often subject to a medical exam) if your circumstances change, or decreasing it to lower premiums. Alternatively, if you have enough money in your cash value account, you can use it to pay premiums.

Pros and Cons of Universal Life Insurance

The ability to change the face value of your coverage without having to surrender your policy is an appealing feature of universal life insurance. Premium payments can be increased, decreased, or even stopped as your financial circumstances or responsibilities change.

Another advantage is the ability to withdraw or borrow funds from the cash value. However, repeated withdrawals may reduce the cash value amount and leave you with little in times of need.

The main disadvantage of universal life insurance is that the interest rate is frequently affected by market conditions. If the policy performs well, there is a chance that your savings fund will grow. However, if it performs poorly, the expected returns are not realized. Another disadvantage is the fees. Surrender fees may apply when you cancel your policy or withdraw funds from your account.

Key Differences

For policyholders, the main distinction between whole life and universal life is the guarantee. Whole life insurance has a death benefit that is guaranteed, level premiums, and a growing cash value. This increase in cash value is due to annual dividends credited to policies.

In place of guarantees, universal life provides flexibility. You can pay more or less for your policy each year, allowing the cash value and death benefit to fluctuate. UL policies are credited based on interest rates rather than dividend payments. This can result in an underfunded UL policy, causing premiums to rise. If those payments are not made, the policy may be canceled.

You pay higher premiums for the guarantees you receive with whole life insurance. An equivalent UL policy will cost less, but policyholders will face some risk.

Special Considerations

The best life insurance for you will be determined by your family structure, financial situation, risk tolerance, and desire for flexibility. Aside from universal and whole life, you can also look into term, group life insurance, and other types of life insurance.

Whatever policy you choose, make sure to compare the companies you're considering to ensure you're getting the best whole life insurance or universal life insurance possible.