Whole Life vs. Universal Life Insurance At a Glance
When looking to purchase a permanent life insurance policy, you will find that there are two main types of life insurance policies: whole life and universal life. While both whole life and universal life insurance may be a good choice, there are many key differences between the two types of policies.
With whole life insurance, a set amount of coverage is provided at a set premium for the lifetime of the insurance policy versus universal life, which can have both a flexible death benefit and premium. Differences between whole life and universal life insurance also lie in the way the policy will perform while the insured is alive. Whole life insurance has a guaranteed cash value that can be assessed by the policyholder at any time. Universal life may have a cash value, but it is not guaranteed.
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A Lifetime of Coverage, Your Way
Life insurance’s main purpose is to protect loved ones from unexpected expenses, such as funeral expenses, medical bills, and income replacement, should the insured pass away. Although most individuals have a need for life insurance, not all people choose to purchase a life insurance policy.
In fact, 106 million American citizens lacked adequate coverage in 2022.
Although any life insurance policy can meet the basic need of providing a death benefit to an insured — there is the best type of life insurance policy for you. Knowing the key benefits of whole life and universal life policies will allow you to make an informed decision and become adequately insured.
Whole Life vs. Universal Life Insurance
Whole Life | Universal Life | |
|---|---|---|
Coverage Length | Permanent | Temporary or Permanent |
Premiums | Set | Flexible |
Death Benefit | Set | Flexible |
Cash Value | Guaranteed | Not guaranteed |
Interest Rates | Set | Varies |
Loans | Usually available | May be available |
Risk of Underfunding | No | Yes |
Whole life insurance provides lifelong coverage with fixed premiums and a cash value component, while compared to universal life insurance that offers more flexibility with adjustable premiums and the potential for greater (or lower) cash value.
What is Whole Life Insurance?
One of the most popular types of permanent life insurance is whole life. This type of policy provides a set death benefit for a set premium that never changes. Whole life is simpler and more predictable, moreover whole life insurance covers a person for life. Whole life policies also provide a guaranteed cash value that the insured can access during their lifetime and may also provide a dividend — a return on premium to the policyholder.
Types of Whole Life Insurance
Within whole life insurance, there are several types of policies to consider, such as traditional whole life, variable whole life and guaranteed issue whole life policies.
Traditional Whole Life
Traditional whole life is the most popular type of whole life insurance. It provides a set death benefit for a set premium for the lifetime of the insured. Traditional whole life insurance also provides a guaranteed cash value — a cash account that the insured can access at any time — by the insurance company paying a set interest rate on the premiums that are then paid in by the insured.
Variable Life
Variable life insurance works similarly to traditional whole life policies. However, the cash value can fluctuate and may not be guaranteed in your life insurance policy. Instead of paying a set interest rate from the insurance provider, the cash value of a variable life policy is built by the life insurance company investing a portion of the premium payments into funded accounts, usually mutual funds. The interest rate that is paid to the insured is not guaranteed and has the possibility of a much higher return or no return at all.
Guaranteed Issue Whole Life
A guaranteed issue whole life policy is a basic whole life policy for a small amount of coverage — usually $5,000 – $20,000 — that is meant primarily for older or sick individuals that may not be able to obtain any other type of whole life or universal life insurance policy. The policies are guaranteed to be issued. However, the premiums for this type of whole life insurance policy may be much higher, and the cash value, if any, may be much lower.
Limited Pay Whole Life
A limited whole life policy is a traditional whole life policy that only has premiums due for a set number of years. For example, a twenty-year limited pay life insurance policy is a whole life policy that will only have premiums for the first twenty years. After that, the policy is paid in full but will stay in force. The cash value will also continue to build within the policy.
What is Universal Life Insurance?
Universal life insurance is a type of permanent life insurance that offers flexibility to the policyholder. Unlike whole life insurance, universal insurance policies allow the policyholder to raise or lower, in reason, their death benefit and premiums. That can be attractive to individuals who may need to lower their premium payments in the event of a tight budget or an emergency. However, if the policy is not properly funded, the policy may cancel prematurely.
Types of Universal Life Insurance
Similar to whole life insurance, universal life insurance has several different types of policies such as plain universal life, indexed universal life, variable universal life, and guaranteed universal life policies.
Universal Life
Universal life is the basic form of universal life coverage. The insured will start with a death benefit and premium, but that can be adjusted within reason. The insurance company will be able to tell the policyholder how high or low the insured can change their premiums and death benefit. It is important to note that if the premium is too low, the policy has the possibility to cancel prematurely. There is the possibility, based on how well the policy is funded, that the policy may build a cash value. However, that is not guaranteed.
Indexed Universal Life Insurance
An indexed universal life policy, also known as an IUL, offers the same flexibility as a basic universal life policy. The main difference with this life insurance policy is how the cash value is built. When the insured pays the premium, a portion will be deposited into an indexed account, such as the S&P 500 stock account. The cash value of the policy will depend on how well the linked account performs. IUL policies usually offer a cap rate meaning that the insured may not ever lose from their cash value account, but they may not make more than a certain percentage no matter how well the linked account performs.
Variable Universal Life Insurance
A variable universal life insurance policy still offers a flexible death benefit and premium but with the ability to possibly maximize the cash value of the account by investing a portion of the premium into an outside fund. However, that also comes with the possibility of losing cash value.
Guaranteed Universal Life Insurance
A guaranteed universal life policy works very similarly to a whole life guaranteed issue policy. These life insurance policies may be offered as a last resort policy for those who may be sick or older in age and cannot obtain another form of coverage. The amounts offered are relatively low, $5,000 – $20,000, and the premiums are usually higher than a normal universal life policy. The possibility of building a substantial cash value in this type of policy is not likely.
Whole vs. Universal Life Insurance: Coverage Length
Whole Life | Universal Life | |
|---|---|---|
Coverage Length | Entire life of insured | Possibility of lifetime coverage if the policy is funded correctly |
Whole vs. Universal Life Insurance: Premiums
Whole Life | Universal Life | |
|---|---|---|
Premiums | May be higher in comparison to UL; never change | May be lower in comparison to WL; can be changed |
Whole vs. Universal Life Insurance: Death Benefit
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Whole Life | Universal Life | |
|---|---|---|
Death Benefit | Set for lifetime of policy | Flexible; may be changed at insured’s request |
Whole vs. Universal Life Insurance: Cash Value
Whole Life | Universal Life | |
|---|---|---|
Cash Value | Guaranteed | Possible but not guaranteed |
Whole vs. Universal Life Insurance: Interest Rates
Whole Life | Universal Life | |
|---|---|---|
Interest Rates | Set percentage rate | No set percentage rate; may be higher or lower than WL |
Whole vs. Universal Life Insurance: Loans
Whole Life | Universal Life | |
|---|---|---|
Loans | Always available on the cashValue of the policy | May be available depending on cash value of the policy |
Whole vs. Universal Life Insurance: Risk of Underfunding
Whole Life | Universal Life | |
|---|---|---|
Risk of Underfunding | May need full underwriting, such as health questions and exam | May need full underwriting, such as health questions and exam |
Which Should You Choose: Whole or Universal Life?
While both whole life and universal life policies may be a good choice, there are certain individuals that each policy may be better suited. Here’s how to choose between whole life insurance and universal life insurance.
Choose Whole Life if…
Someone who would prefer a set premium, set death benefit, and guaranteed cash value should look into a whole life policy. For example, a young, healthy person may look at getting a whole life policy that would be a set price and would gain cash value over time. This type of policy is best suited for those who know their budget and can afford to keep the policy forever.
Choose Universal Life if…
On the other hand, a universal life policy may be better suited for someone who is looking for flexibility and is not as concerned about the cash value. For example, a single parent who needs a large amount of coverage now may choose a high death benefit with a lower premium. Down the road, they may be able to lower the death benefit and raise their premium to meet their needs.
Advantages
Whole Life
There are many advantages to purchasing a whole life policy.
- Fixed premiums: The price of the policy will never change, allowing the policyholder to plan their budget accordingly.
- Fixed Death Benefit: The death benefit will not change. This gives the insured the knowledge of how much coverage they will have.
- Guaranteed Rate of Return: The interest rate paid to the policyholder is guaranteed and will not drop below the guaranteed rate. This allows the cash value of the policy to build for use during the insured’s lifetime.
- Dividends: Dividends are a return of premium to the policyholder that is not guaranteed, but many insurance companies have a history of paying dividends consistently. The owner of the policy can access the dividends at any time for any reason.
Universal Life
Although different than whole life, universal life also has many benefits to consider.
- Flexible Premiums: If the insured can no longer afford a higher premium, they have the option to lower, or possibly stop, the premium of a universal life policy instead of canceling it altogether.
- Flexible Death Benefit: Over time, situations may change that warrant a change in coverage. With a universal life policy, the death benefit may be able to be raised or lowered, giving the policyholder flexibility.
- Cash Value Withdrawals: Although the cash value of a universal life policy isn’t guaranteed, when there is an amount that is available, the insured is able to take a portion of the cash value. With a whole life policy, a partial cash value withdrawal may not be possible.
Drawbacks
Whole Life
Although whole life insurance has many advantages, there may be a few drawbacks as well.
- Higher Premiums: Even though a whole life policy’s premiums are set and won’t change, they may be higher than a universal life policy for the same coverage.
- Lack of Flexibility: A whole life policy doesn’t offer much flexibility when it comes to important factors such as the death benefit and premiums.
Universal Life
When looking at a universal life policy, it is important to know the drawbacks as well as the benefits.
- Varying Interest Rate: Unlike a whole life policy, a universal life policy does not have a set interest rate; the rate may vary depending on the market and the performance of the insurance provider.
- Underfunding: Because of the flexibility that a universal life policy offers, it is possible that the premium may be lowered too far, causing the policy to become underfunded. When this happens, the policy runs the risk of lapsing prematurely.
- Fees: Although most life insurance policies do have a fee associated with the policy, those of a universal life may be higher than others due to their association with the market.
How to Get It: Whole and Universal Life Insurance
Once a decision has been made if a whole life or universal life policy is best, it is time to take the next step in purchasing the policy. First, research companies to ensure that they are reputable and financially secure. Find an agency that reviews and rates insurance companies to provide consumers with upfront purchasing knowledge. Once an insurance company is decided upon, reach out and get a quote. The representative can provide you with detailed information on each quote for these two types of permanent life insurance, such as premiums, death benefits, cash value, etc.
Then, submit a life insurance application for either universal and whole life insurance. This step may vary from company to company but will likely include filling out an application, answering health and lifestyle questions, undergoing underwriting, and submitting a payment. Once all steps have been completed, the insurance provider will follow up with you to review the completed policy and deliver it to you.
Parting Thoughts
When looking for permanent life insurance, there are two main types: whole life and universal life. Depending on the unique situation of a consumer, one policy may be better suited than the other.
For someone seeking a stable payment, death benefit, and cash value growth, whole life would be the best option. For someone seeking flexibility with premiums and the death benefit — plus the possibility of a larger return on their premiums — a universal life will be the better choice. No matter which choice is best, having key knowledge of both policies will help make the most informed decision.