Comparing Universal Life Insurance vs. Whole Life

In this article...
  • Compare universal life insurance vs. whole life in terms of cost, features and benefits so that you can select the type of coverage that is right for you.

Permanent life insurance allows you to buy insurance once and remain covered until you die. When shopping for permanent insurance, you have two main types of policies to consider: whole and universal. Carefully comparing universal life vs. whole life will help ensure you get the right coverage for your needs.

Universal Life Insurance vs. Whole Life: What's the Main Difference?

Universal and whole life insurances have two key similarities: permanence and a cash account. Both types of insurance remain in place until you die and have a cash savings component. The main differences between them are flexibility and how the cash savings component works.

Whole Life

With a whole life insurance policy, a portion of your monthly premium goes into a cash account that earns interest. The death benefit and premium are locked in when you take out the policy. Often, premiums and death benefits remain level or the same throughout the duration of the policy. You may be able to select a policy where the death benefit increases over time, and your premium payment goes up accordingly. Some policies are also paid up at a certain age, meaning that you only make premium payments for a limited amount of time. In any case, you must decide that you want this type of coverage before you buy.

Universal Life

Universal life insurance is highly flexible and gives you the ability to make changes after a policy takes effect. You may be able to increase and decrease the size of the death benefit as needed. In addition, some policies let you forgo premium payments if you have enough cash value to cover them.

Some of each premium made on a universal life policy is put into a cash account. How you earn interest on the money varies based on what type of universal life you have.

  • Guaranteed universal life pays a guaranteed interest rate similar to whole life.
  • Indexed universal life bases interest paid on the performance of a third-party index like the S&P 500.
  • Variable universal life pays interest based on the performance of accounts tied to stocks and bonds. Often, you can choose the investments yourself.

Which Is Better: Whole Life or Universal?

Life insurance isn't one-size-fits-all. To decide whether whole life or universal life is the better option for you, consider the benefits and drawbacks of each type of life insurance.

Benefits of Whole Life

Some benefits of whole life include:

  • Guaranteed cash value. You'll know exactly how much the policy will be worth over time due to a fixed interest rate.
  • Potential for dividend payments. Some policies pay an annual dividend when their issuing insurance companies perform well. Normally, dividends are tax-free because the IRS considers them a return of premiums paid.
  • Set premiums. Your premium rate usually remains the same over the life of the policy, letting you easily budget.
  • Access to loans. You can take out a policy loan against the cash value of whole life insurance, and the insurer won't require you to pay the money back. If you still owe on the loan when you die, the insurance company subtracts the balance from the death benefit.
  • Cash withdrawal options. If you need money to cover expenses, you can withdraw from the cash value. This reduces the size of the death benefit.

Drawbacks of Whole Life

 Some drawbacks of whole life include:

  • Higher cost. Whole life insurance is often more expensive than universal life.
  • Effects of age. If you're an older adult, whole life insurance is likely to be expensive, and you may not have enough time to build up significant cash value.
  • Less flexibility. You usually can't increase the death benefit of a whole life policy once it's in effect.
  • Low interest. Compared to other types of investments, the interest rate paid on whole life cash value is modest.

Benefits of Universal Life

Some benefits of universal life include:

  • High flexibility. The flexibility of universal life insurance lets you modify your policy as your financial needs change over time.
  • Access to loans. Policy loans are usually available for universal life insurance.
  • Ability to make withdrawals. Most universal life insurance policies let you make at least one cash withdrawal to cover expenses.
  • Lower cost. Universal life insurance is often less expensive than whole life.
  • Higher interest. Indexed and variable universal life insurance usually pay a higher rate of interest than whole life.

Drawbacks of Universal Life

Some drawbacks of universal life include:

  • No dividends. Only whole life insurance pays dividends.
  • Risk of loss. Guaranteed universal life insurance generally pays a low interest rate. To potentially earn significant interest, you need to select indexed or variable universal life. With either type, the cash value may go down if the index or account tied to your policy loses value.
  • High fees. You may have to pay a fee if you withdraw money.
  • More complicated. Due to flexibility, universal life insurance is more complex than whole life. You may require more support from your life insurance agent to understand your coverage and take advantage of its benefits.
  • Ongoing medical exams. The insurance company may ask you to undergo a medical exam each time you want to increase the size of your death benefit.

Can You Convert Universal Life to Whole Life?

By adding a rider to a universal life policy, you may be able to convert it to paid-up whole life insurance. With this arrangement, you would make monthly premium payments until you reach a certain age like 50 or 65. Then, you'd stop making payments and have the benefits of whole life coverage until you die. Your premium is likely to increase to help you pay off the policy by the specified age.

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