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Whole vs universal life insurance

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If you need lifelong life insurance coverage, you may be considering a permanent life insurance policy. Both whole and universal life insurance policies offer permanent coverage that lasts your entire life. What is the difference between these policy types, and which type of coverage is best for your situation? Bankrate’s team of insurance editors conducted research that may help you decide.

Just like with home and auto insurance, every person’s life situation and financial goals are unique. If you are considering universal vs whole life insurance, there are some key similarities and differences to take into account when choosing a permanent life insurance policy.

Whole life insurance

Whole life is a type of permanent life insurance that provides a death benefit to your beneficiary no matter how old you are when you die. The premium you get approved for when you initially sign up for whole life insurance is locked in for life and will never increase. Whole life insurance is payable for a specific length of time. Some policies are paid up until age 99 or 100, while others come with higher premiums but only require premium payments for 10 or 20 years, called 10-pay or 20-pay whole life insurance policies.

This type of permanent life insurance also includes a cash value component. Part of your premium payments go into a savings 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 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, minus any fees set 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 Premiums can be expensive for large amounts of coverage
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

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

When applying for universal life insurance, you have more options vs 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 you may not gain any value with indexed universal life insurance.

Pros of universal life insurance Cons of universal life insurance
Flexibility with premiums Premiums can be expensive for large 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

Whole life vs universal life

When comparing universal life vs whole life insurance, there are some similarities. Both offer permanent life insurance coverage with a cash value portion of the policy you can borrow against or withdraw. If you cancel either life insurance policy, you will be refunded a portion of the cash value after any charges or fees are paid.

However, there are some key differences between whole life vs universal life. With whole life, you are locked into a set premium and death benefit amount. Universal life provides flexibility in both the death benefit and premiums, as long as certain criteria are met first. You may be able to grow cash value faster in universal life vs whole life, but it is not guaranteed.

How do I choose what is right for me?

Finding the right type of permanent life insurance comes down to your financial situation and family needs. When choosing between whole life and universal life, consider how important flexibility is to your needs. It is also important to compare life insurance companies and the types of policies they offer, including fees assessed, to find the best type of life insurance company and policy to protect your family’s lifestyle.

Frequently asked questions

What is the best life insurance company?

The best life insurance company is one that has the right life insurance policy for your needs. Consider how much coverage you need, costs based on your age and health, and what you can afford to keep paying into for as long as the policy requires it.

Is whole life or universal life insurance better?

One is not necessarily better than the other, it comes down to your needs, risk tolerance and desire for flexibility. The cost of life insurance is also a factor to think about, which is why you should compare several policy options and insurance companies to find the right fit. Although life insurance rates don’t vary as much between companies as auto or home premiums do, you may want to consider a few different types of coverage to find the right option for you.

Should I cash out my universal life insurance policy?

With a policy that builds cash value over time, it can be tempting to cancel the policy and take the cash value. If you no longer need life insurance, cashing out your universal life insurance policy is an option. But if you still have a need for life insurance, consider taking a loan against the cash value instead if you just need the cash. This way, the life insurance stays in force and you get the cash infusion you need now. Reviewing any actions with an agent is an important step, as life insurance loans can be complex.

Written by
Mandy Sleight
Insurance Contributor
Mandy Sleight has been a licensed insurance agent since 2005. She has three years of experience writing for insurance websites such as, MoneyGeek and The Simple Dollar. Mandy writes about auto, homeowners, renters, life insurance, disability and supplemental insurance products.
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Insurance Writer & Editor