| Universal Life vs. Whole Life | |
|---|---|
| Universal Life | Whole Life |
| Flexible premiums | Fixed premiums |
| May allow you to increase or decrease the death benefit | Guaranteed death benefit |
| Offers potential cash value that you can use while still living | Offers guaranteed cash value to use while you’re still living |
| Interest rates can change over time | Earnings are guaranteed |
| Lower premiums | Higher premiums |
| May become underfunded and lapse | Can never become underfunded |
Whole Life Insurance
Whole life insurance covers you for the rest of your life, regardless of how long you may live. As long as you keep paying the premiums, your beneficiaries will receive the death benefit when you die. This policy is highly suitable for long-term responsibilities such as a dependent adult child’s care or post-death expenses like estate taxes.
How Whole Life Insurance Works
One of the features of whole life insurance is that it combines coverage with savings. Your insurance company puts part of your premium payments into a high-interest bank account or investment account. With every premium payment, your cash value increases. This savings element of your policy builds up your cash value on a tax-deferred basis.
Whole life insurance is made to fulfill an individual’s long-term goals, and it is important to keep it going for as long as you live.
To borrow against a whole life policy, you must meet a minimum cash value requirement, as you can’t borrow against the policy’s face value.
Pros and Cons of Whole Life Insurance
One attractive feature of whole life policies is the guaranteed cash value. Because you can borrow against it—or surrender your policy to get the cash value—it offers some financial flexibility in case of an emergency.
Some whole life policies pay dividends as well, although they are not guaranteed. If you do receive them, you can opt to take them annually in cash, let them accumulate interest, or use them to reduce your policy’s premiums or buy additional coverage.
However, the level premiums, fixed death benefits, and attractive living benefits (e.g., loans and dividends) make this kind of policy quite expensive, especially compared with term insurance. It is advisable to buy whole life insurance when you are younger to be able to afford it in the long term.
Universal Life Insurance
Universal life insurance is also called adjustable life insurance because of the flexibility it offers. You have the ability to reduce or increase your death benefit and adjust your premiums (subject to certain limits) once there is money in the account.
How Universal Life Insurance Works
When you make a payment to your universal life insurance plan, part of it goes into an investment account, and any interest accrued is credited to your account. The interest you earn grows on a tax-deferred basis, increasing your cash value.
You can adjust the death benefit when needed, increasing it (often subject to a medical exam) if your circ*mstances change, or lowering it to reduce premiums. Alternatively, you can use your cash value to pay premiums as long as there is enough money in that account.
Pros and Cons of Universal Life Insurance
The ability to adjust the face value of your coverage without surrendering your policy is an attractive feature of universal life coverage. As your financial circ*mstances or responsibilities change, you can increase, decrease—or even stop—premium payments.
Another perk is the ability to partially withdraw or borrow funds from the cash value. However, you have to keep track of withdrawals, because they reduce the cash value amount—if you withdraw too much, you may have little left in a time of need. If your premiums don’t cover the cost of insurance and you have no cash value, then your policy could lapse.
Another downside of universal life insurance is the interest rate, which is often dependent on market conditions. If the policy performs well, there are chances of potential growth in your savings fund. On the other hand, if it performs poorly, then the estimated returns aren’t earned—and that might increase your premiums.
Another negative feature: the fees. As with all permanent life insurance policies, surrender charges may be levied at the time of terminating your policy or withdrawing money from the account, especially in the early years.
Make sure to discuss the status of your cash value fund with your insurance advisor or agent before stopping the premiums. Your policy may lapse if you cease to pay premiums and have insufficient cash value to cover the cost of insurance.
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Key Differences
The biggest difference for policyholders between whole and universal life is the guarantees:
- Whole life has a guaranteed death benefit, level premiums, and growing cash value. This growth in cash value comes from annual dividends that are credited to policies.
- Universal life provides flexibility in lieu of guarantees. You can pay more or less each year for your policy (within limits), and this also will allow the cash value and death benefit to fluctuate. Rather than dividend payments, UL policies are credited based on interest rates. This can lead to a UL policy becoming underfunded, causing premiums to rise. If you can’t meet those payments, then the policy can terminate.
With whole life, you pay higher premiums for the guarantees you are given. An equivalent universal life policy will cost less but will also carry a certain degree of risk to policyholders.
Special Considerations
The right life insurance for you will depend on your family structure and financial situation, as well as your appetite for risk and desire for flexibility. In addition to universal life and whole life, you also can explore other forms of life insurance such as term life, group life, and more.
Regardless of which type of policy you decide on, be sure to compare the companies you’re considering as well, to ensure that you’re getting the best whole life insurance or best universal life insurance possible.
What is term life insurance?
Term life insurance is a low-cost option that provides a death benefit for a given number of years (the term), such as 10 or 20 years. Term policies, unlike whole or universal life, don’t accumulate any cash value. Term life is often the cheapest option.
What is indexed universal life (IUL) insurance?
Indexed universal life (IUL) is a variation of universal life (UL) in which the cash component of the policy is linked to the performance of a stock market index, such as the . The policyholder decides how much cash value to assign to either a fixed account or the equity-indexed account.
There will be a cap above which the policy will no longer credit the account, such as 12% per year. Thus, even if the S&P 500 grows 20% in a given year, the policy will only earn 12%. If the index falls, returns can be inferior, though there are often floors to prevent extreme losses.
How long does universal life (UL) insurance last?
As long as a universal life policy is fully funded and premiums are paid on time, a UL policy will be in force permanently, until one’s death.
Can you convert a term life policy into whole life?
Depending on the insurance company and conditions of a term policy, you may be able to convert it into permanent coverage without needing a new medical exam. The new whole life policy will come with higher premiums, based on the age you are when you do the conversion.
The Bottom Line
Universal life (UL) and whole life are two types of permanent life insurance. Their differences include the fact that universal life policies provide flexible premiums and death benefits but have fewer guarantees, while whole life policies feature predictable premiums and guaranteed cash value accumulation.
You can borrow against or withdraw the cash value with both of these types of life insurance. Be aware, though, that a whole life policy will usually carry higher premiums than an equivalent UL policy.
