Whole vs universal life insurance
It can take a long time to shop for and buy life insurance. There are various types of life insurance to consider, as well as premium costs based on your age and health. You might even have life insurance but find it isn't the right fit, so you're looking for something that will meet your family's needs.
Every person's life situation and financial goals are unique, just like their home and auto insurance. When deciding between universal and whole life insurance, there are some key similarities and differences to consider when selecting a permanent life insurance policy.
Whole life insurance
Whole life insurance is a type of permanent life insurance that pays a death benefit to your beneficiary regardless of your age when you die. The premium you are approved for when you first apply for whole life insurance is guaranteed for life and will never increase. Whole life insurance is paid out for a set period of time. Some policies are paid up until the age of 99 or 100, while others, known as 10-pay or 20-pay whole life insurance policies, have higher premiums but only require payments for 10 or 20 years.
This type of permanent life insurance has a cash value component as well. Part of the money you pay toward the premium is invested in the policy over time, tax-deferred. When you reach a certain amount of cash, you have the option of borrowing some of it as a loan or withdrawing it, which may have tax implications.
Though not guaranteed, the cash value may pay out dividends that you can keep or reinvest in the policy to allow the cash value to grow, lower your premiums, or pay for more coverage. If you cancel or surrender your whole life policy, you are entitled to the policy's cash value, less any fees imposed by the life insurance company.
Pros of whole life insurance | Cons of whole life insurance |
Cash value grows over time with option to take a loan or withdraw | More expensive than term life insurance |
Dividends can be used as cash, to pay premiums or buy more insurance | Best purchased when young to get low, manageable rates |
Premiums are locked-in for life | Guarantee cash value growth is low compared to other investment vehicles |
Ability to cancel policy and receive cash value | Fees can be high, determined by life insurance company |
Universal life insurance
A type of permanent life insurance is universal life insurance. Universal life, like whole life, provides permanent coverage as well as the ability to accumulate cash value over time. When it comes to premiums and death benefits, universal life insurance outperforms whole life insurance.
When compared to whole life insurance, you have more options when applying for universal life insurance. You can select a plan with a fixed premium and death benefit or one with an adjustable premium and death benefit that allows you to adjust the premiums and death benefit as long as certain minimums are met first. Once the policy's cash value has grown, you can use it to pay premiums.
Universal life insurance policies, like whole life insurance policies, have a guaranteed minimum cash value growth potential set by the insurance company. Others, known as index universal life insurance, are linked to a stock market index, which can allow cash value to grow faster but also increases the risk of value loss. Some companies have loss prevention built in, so you will not lose money with indexed universal life insurance, but you may not gain any value.
Pros of universal life insurance | Cons of universal life insurance |
Flexibility with premiums | Higher premiums vs term life insurance |
Can be cheaper than whole life insurance | More fees |
Can adjust death benefit up or down if needed | No dividend option with index universal life |
Borrow or withdraw funds from cash value | May require medical exam to increase death benefit amount |
Whole life vs universal life
There are some similarities between universal life and whole life insurance. Both provide permanent life insurance with a cash value portion of the policy that can be borrowed or withdrawn. If you cancel either life insurance policy, you will receive a portion of the cash value after any charges or fees are deducted.
However, there are some significant distinctions between whole life and universal life. With whole life insurance, you are committed to a fixed premium and death benefit amount. As long as certain criteria are met first, universal life provides flexibility in both the death benefit and premiums. It is possible that universal life will grow cash value faster than whole life, but this is not guaranteed.
How do I choose what is right for me?
Finding the right type of permanent life insurance is determined by your financial situation and the needs of your family. Consider whether flexibility is important to you and whether you can handle the risk that universal life insurance entails. To find the best type of life insurance company and policy to protect your family's lifestyle, compare life insurance companies and the types of policies they offer, including fees assessed.
Frequently asked questions
What is the best life insurance company?
The best life insurance company is one that offers the best life insurance policy for your specific needs. Consider how much coverage you require, the costs associated with your age and health, and how much you can afford to pay into the policy for as long as it is required.
Which is better whole or universal life insurance?
One is not necessarily superior to the other; it all depends on your needs, risk tolerance, and desire for flexibility. The cost of life insurance is also an important consideration, which is why you should compare different policy options and insurance companies to find the best fit.