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Whole vs. universal life insurance
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If you’re looking to buy permanent life insurance — the kind that stays in place for your entire life, assuming the premiums are paid — you may have seen whole life and universal life as options. These are two of the most common permanent life insurance policies, but there are significant differences between the two. Bankrate can help you understand how these policy types differ so you can make an informed decision about which is right for your needs.
Whole life vs. universal life
Whole and universal life policies have certain similarities. Both policies offer permanent life insurance coverage with a cash value portion that you can borrow against, use to pay premiums or withdraw. If you cancel either life insurance policy, you will typically be refunded a portion of the cash value up to the amount of premiums paid after any charges or fees are paid. With both policies, the money in the cash value account can usually be invested to earn returns and/or interest.
However, there are some key differences between whole life vs universal life. With a whole life policy, policyholders are locked into a set premium and death benefit amount. Universal life policies, on the other hand, typically allow policyholders to adjust the amount they pay in premiums and the amount of their death benefit, as long as certain criteria are met. In addition, universal life cash value accounts are typically higher risk and higher reward than whole life policies. With whole life insurance policies, dividends from your cash value account investments are usually guaranteed but capped, which limits the amount of returns a policyholder can make. Universal life cash value accounts typically do not cap the amount of returns a policyholder can make unless it is a fixed product, but do not guarantee returns either. In this way, it’s possible for universal life policyholders to either gain or lose money on their cash value accounts.
|Policy attribute||Whole life||Universal life|
|Cash value growth||Fixed/capped||Varies depending on several factors|
|Flexible death benefit||No||Yes|
Whole life insurance
Whole life is a type of permanent life insurance that provides a death benefit to your beneficiary for your entire life in most circumstances. The premium you get approved for when you initially sign up for whole life insurance is locked in for life in most circumstances and will never increase.
This type of permanent life insurance also includes a cash value component. Part of your premium payments go into this cash value account which builds, tax-deferred, in the policy over time. Once you meet a minimum required cash value, you can choose to borrow some as a loan or withdraw it, which may have tax implications.
Though it’s not guaranteed, the cash value could pay out dividends, which you can choose to keep or reinvest into the policy to allow the cash value component to grow, reduce your premiums or pay for more coverage. If you cancel or surrender the whole life policy, you are eligible to keep the cash value in the policy, up to the limits of premiums you’ve paid in, minus any fees set by the life insurance company.