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Whole vs. universal life insurance

Making healthy financial decisions for the sake of their future
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Making healthy financial decisions for the sake of their future
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Whole and universal life insurance are two different types of permanent life policies, which means they’re designed to stay in force for the insured’s entire life and they come with a cash value account in addition to a death benefit. Whole and universal life policies are generally much more expensive than term life insurance policies, since they don’t expire and the insurance company has an almost certain probability of paying out the death benefit as long as premiums are paid. While whole and universal life are both classified as a permanent policy, they differ in important ways.

The main difference between whole and universal life insurance is that universal life policies offer greater choice and flexibility when it comes to investing the money in the policy’s cash value account, deciding premium payments and choosing death benefit amounts. Whole and universal policies are nuanced, so you may want to research each type carefully to decide which option is right for you.

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 in 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.

Pros and cons of whole life insurance

Pros Cons
Cash value component grows over time with option to take a loan or withdraw Premiums can be expensive for larger amounts of coverage
Premiums are locked-in for life Best purchased when young to get low, manageable rates
Ability to cancel policy and receive portion of cash value Guaranteed cash value growth is low compared to other investment vehicles
Cancellation fees can be high, determined by life insurance company

Pros and cons of universal life insurance

Pros Cons
Flexibility with premiums Premiums can be expensive for larger amounts of coverage
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

An important step of the research process is understanding each product line in greater depth. Learning more about whole and universal life insurance in the sections below may help you make an informed decision.

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

Written by
Lizzie Nealon
Insurance Writer
Lizzie Nealon is a former insurance writer for Bankrate. Her favorite part of the job is making home, auto and life insurance digestible for readers so they can prepare for the future.
Edited by
Insurance Editor
Reviewed by
Senior wealth manager, LourdMurray