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Whole vs. universal life insurance
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- Universal and whole are two types of permanent life insurance policies. While the two share similarities, each has unique pros and cons.
- Whole life policies tend to have more guaranteed benefits than universal life insurance– and premiums for whole life are usually higher.
- Speak with a financial advisor or insurance agent for help deciding whether whole life, universal life or another kind of insurance coverage best suits your needs.
If you are looking to purchase permanent life insurance—the kind that stays in place for your entire life, assuming the premiums are paid—you may be trying to decide between two common options: whole life and universal life. While these policy types share certain commonalities, there are significant differences between them; understanding each could help you better meet your family’s financial goals. Bankrate can help you understand the differences between universal and whole life insurance 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 from. 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|
How do I choose between whole life and universal life?
When choosing between universal vs whole life insurance, 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.