Knowing their pros and cons will help you decide what’s right for you
Whole Life Insurance vs Universal Life Insurance: An Overview
Both types of life insurance are perpetual life insurance. Unlike term insurance, which guarantees the payment of death benefits over a specific period, permanent policies provide lifetime coverage. If you cancel your permanent life insurance policy, you will get the cash value of the policy (minus any fees).1
These types of life insurance policies usually consist of two parts: a savings or investment part and an insurance part. This makes premiums higher than term policies. Policyholders can also borrow against the cash value of the policy. Hence, permanent life insurance is also known as cash value insurance.
While similar in some ways, whole life and universal life insurance have some key differences. Lifetime coverage; offers consistent, fixed premiums and guaranteed cash value accumulation. Universal life insurance offers consumers flexibility in premium payments, death benefits, and a savings factor in their policies. Here, we’ll take a deep dive into each type.2 3
- Whole life insurance and universal life insurance are both permanent life insurance.
- Whole life insurance offers consistent premiums and guaranteed cash value accumulation, while universal policies offer flexible premiums and death benefits.
- You can borrow against the cash value of the entire policy or the universal policy.
Whole life insurance
Whole life insurance covers the rest of your life, no matter how long you live. As long as you continue to pay your premiums, your beneficiary will receive a death benefit upon your death. This policy is great for long-term responsibilities like raising adult children or post-death expenses like estate taxes.
How Whole Life Insurance Works
A feature of this type of life insurance is that it combines coverage with savings. Your insurance company deposits some of your premiums into a high-interest bank account or investment account. With each premium payment, your cash value increases. This savings element in your policy builds your cash value on a tax-deferred basis. Whole life insurance is designed to meet an individual’s long-term goals, and it’s important to keep it going throughout your lifetime.1
To borrow against the policy, you must meet the minimum cash value requirement, as you cannot borrow against the face value of the policy.
Pros and Cons of Whole Life Insurance
An attractive feature of a whole life policy is the guaranteed cash value. Because you can use it or waive your policy for cash value, it provides some financial flexibility in an emergency.
This dividend also gives you some flexibility in your company’s offer. You can choose to receive cash each year and let them accrue interest, or use them to reduce your policy premiums or buy additional coverage.
However, premium levels, a defined death benefit, and attractive living benefits such as loans and dividends make this insurance quite expensive, especially compared to term insurance. It is recommended to purchase whole life insurance when you are young to be affordable in the long term.
Universal Life Insurance
Universal life insurance is also known as adjustable life insurance because it provides flexibility. Once you have funds in the account, you have the right to reduce or increase your death benefit at any time and pay any amount of insurance premiums (subject to certain limitations) .4
How Universal Life Insurance Works
When you pay your universal life insurance plan, a portion of it goes into an investment account, and any accrued interest is credited to your account. The interest you earn grows on a tax-deferred basis, increasing your cash value.5
You can adjust your death benefit as needed, increase it if your circumstances change (usually with a medical examination), or lower your death benefit to reduce insurance premiums.6 Alternatively, you can pay the premium with your cash value, as long as there is enough money in the account.4
Pros and Cons of Universal Life Insurance
The ability to adjust the face value of the policy without giving up the policy is an attractive feature of universal life insurance. You can increase, decrease or even stop premium payments as your financial situation or responsibilities change.6
Be sure to discuss the status of your cash value fund with an insurance advisor or agent before you stop paying your premiums. If you stop paying your insurance premiums and don’t have enough cash to pay your insurance premiums, your policy may lapse.
Another benefit is the ability to partially withdraw or borrow funds from the cash value. However, you cannot make repeated withdrawals as this may reduce the cash value amount and leave you with very little if needed.
The main disadvantage of universal life insurance is the interest rate, which tends to depend on market conditions. If policies are implemented well, your savings fund has the potential to grow. On the other hand, if it underperforms, the estimated return cannot be earned. Another negative feature is fees. Surrender charges may be imposed when you terminate your policy or withdraw funds from your account.
Decide what’s right for you
Right life insurance because you will depend on your family structure and financial situation, as well as your appetite for risk and desire for flexibility. In addition to universal life and whole life insurance, you can also explore other forms of life insurance such as term life insurance, group life insurance, and more.
No matter which policy you decide on, be sure to compare the companies you’re considering to make sure you’re getting the best results Best Whole Life Insurance or Best Universal Life Insurance possible.