Whole vs. universal life insurance

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.

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.

Universal life insurance

Universal life insurance is also a type of permanent life insurance. Like whole life, universal life offers permanent coverage (in most circumstances) and the ability to grow cash value over time. When comparing whole life versus universal life, universal life insurance has more flexibility with premium payments and death benefits.

When applying for universal life insurance, you have more options than with whole life insurance. You can choose a level premium and death benefit or an adjustable plan, which allows you to raise or lower premiums and death benefit, as long as certain minimums are met first. Once cash value has grown in the policy, you can also choose to use it to pay premiums.

Like whole life, universal life insurance policies have guaranteed minimum cash value growth potential set by the insurance company. Others, called index universal life, are tied to a stock market index, which can allow cash value to grow faster but also runs the risk of losing value. Some companies have loss prevention built in, where you will not lose money, but your return is often limited to a certain annual percentage and you may not gain any value with indexed universal life insurance.

How do I choose between whole life and universal life?

When choosing between whole and universal life, you may want to focus on the key differences between these life insurance policies. When it comes to the cash value account, would you rather have the stability of guaranteed returns with whole life insurance? Or would you prefer the higher risk, higher reward aspect of universal life cash value accounts which may generate much higher or lower returns? Would you like your policy to maintain fixed premiums and death benefit amounts as with whole life, or would you prefer the flexibility of changing your premium and death benefit amounts as with universal life? A certified financial planner or other qualified financial advisor may be able to help you decide which of these products is right for you. Once you’ve decided on whole or universal life, an independent insurance agent can help you choose a life insurance provider.

Frequently asked questions