Permanent life insurance comes in a variety of flavors, two of the most common being whole life and universal life. Both of these options come with a cash value and are made to last for the entirety of one's life. On the other hand, there are a number of significant distinctions. Find out what the similarities and differences are between whole life insurance and universal life insurance, as well as the circumstances in which it can make the most sense to select one type of insurance over the other.
Key Takeaways
- Both whole life insurance and universal life insurance can offer coverage that lasts a person's entire life.
- There is greater predictability with whole life insurance, but there is also less flexible. It often involves payments that are the same amount each month, and the cash values are indicated when the insurance is issued.
- The premiums for universal life insurance can be adjustable; however, the cash value of the policy is not established until after it has been granted.
- If you want to have peace of mind, you might want to consider purchasing whole life insurance. If you value flexibility and have a healthy appetite for risk, universal life insurance can be a good option for you to consider.
- Term life insurance is a good solution to consider if you do not require coverage that is in effect permanently.
What Is the Difference Between Whole Life Insurance and Universal Life Insurance?
Permanent life insurance coverage can come in the form of whole life and universal life insurance, respectively. They are made to provide you with protection for the entirety of your life. These two categories of insurance plans are similar in a number of important respects.Cash Value
Permanent life insurance policies that include a cash value are known as whole life and universal life policies, respectively. This can help to make the monthly premium payments that are necessary to keep a policy active more manageable. In the early years of the policy, it is customary for you to make payments that are greater than the costs associated with providing life insurance. These "additional" payments make it possible for the cash value to increase over the course of time, which, if all goes according to plan, will assist in finding coverage for the rest of your life. The growth of the cash value of a life insurance policy is exempt from taxation. That means you won't have to pay taxes on that money until you take it out of the account in the form of withdrawals or loans, provided that your policy permits you to do so. The death benefit is reduced by the amount of any outstanding loans, and both withdrawals and loans have the risk of causing you to lose coverage.Lifelong Coverage
Your coverage can continue for the rest of your life, provided that you continue to pay the required premiums. Your coverage may become invalid, though, if the insurance policy runs out of money (or end). This can occur if you do not pay the required amount of the premium each month. Take into consideration the possibility that your cash worth will progressively decrease as a result of withdrawals or deductions (for the cost of insurance and other costs). In such a scenario, continued insurance protection can demand the payment of additional premiums. If you utilize the cash value of your policy for policy loans or withdrawals, you run the risk of having your coverage canceled, and you could be required to pay taxes on any gains that result from your policy (more on gains in the table below).Surrender Periods
A surrender term is typically included in both universal and whole life insurance contracts, and it can sometimes run for as long as 20 years after the policy has been issued. During this period, there will be a fee associated with the surrender of the policy as its whole, as well as any withdrawals from the cash value. The amount that you would receive from the policy if you were to surrender is referred to as the cash surrender value, and it is calculated by subtracting the cash value from the surrender charges that are applicable. The cost of surrendering an investment can be substantial, particularly in the first few years, but it will typically get cheaper every year up to the conclusion of the surrender period. Make sure you are aware of the length of the surrender period for any policy that you are contemplating purchasing as well as the method by which surrender charges are determined.Comparison of Whole Life Insurance and Universal Life Insurance
Although whole life and universal life insurance plans have a number of things in common, their operations are somewhat distinct from one another, particularly with regard to the payment of premiums and the method that is used to establish the cash value.| Policy Features | Whole Life | Universal Life |
| Cash value crediting rate | Guaranteed, cash values are typically fixed at policy issue | Minimum guaranteed interest rate; actual rate depends on current interest rates |
| Dividends | Yes, for participating policies | No dividends |
| Premiums | Typically level premiums | Flexible premiums |
| Stock market exposure | None | Potential market exposure |
Crediting Rate Based on Cash Value
The cash value of your whole life insurance policy is normally grown at a predetermined crediting rate, which means that you are always aware of the exact amount that the cash value will be in any given year. As a direct consequence of this, whole life insurance is far more reliable. Your cash value can be credited at a rate that is not known in advance when you have universal insurance because it is reliant on the current market interest rates or, for some policies, the gains and losses of the stock market. As a consequence of this, it is impossible to estimate how much of a financial value a universal policy will have at any particular moment in time. If the cash value doesn't grow by an adequate amount, you might have to pay more into the insurance than you originally anticipated in order to keep it from expiring.Dividends
There is a type of whole life insurance policy called participation whole life that can generate dividends. Policyholders may be eligible to earn dividends if the insurance firm achieves performance that is superior to that which was anticipated. However, dividends are not guaranteed. You can put dividends to use in a number of different ways, such as increasing the amount of life insurance you have, lowering the required premiums, or increasing the amount of interest you get. Universal life policies do not pay dividends.Premiums
Traditional whole life insurance policies demand that policyholders make premium payments that, for the most part, remain constant over the course of the policy's duration. These premiums could be paid on a monthly, annual, or even quarterly basis at your discretion. There are a few ways this concept can be expressed, but in general, if you pay the required rates, you are assured of having coverage. You have the ability to determine how much you pay for premiums when you have a universal life insurance policy; however, you do need to pay enough to keep a cash value that is adequate to cover the costs of the policy. Historically, whole life insurance has been the sort of coverage that has been purchased the most (as measured by annual premiums). At the present time, the market share held by whole life and universal life insurance is about equivalent to one another. It's possible that this is somewhat attributable to the flexibility offered by the universal policy.Stock Market Exposure
There is no interaction between whole life insurance and the financial markets. Even while not all universal policies are connected to the markets, if you have variable universal life or indexed universal life insurance, you could be subject to the profits and losses of the stock market. It is possible to lose money in the markets, particularly when dealing with variable universal life insurance contracts. In the event that things go poorly, this could put your coverage at risk.Which Is the Best Option for You?
Your level of comfort with risk, the degree of certainty you need, and the degree to which you value flexibility all play a role in determining the kind of life insurance policy that best suits your needs. Universal Life If you are looking for permanent life insurance and are okay with having some uncertainty in your coverage, universal life insurance can be a good option for you. It's possible that the cash value in a non-variable universal life policy will have a minimum interest rate that is guaranteed to be at least a certain amount, but because the cash value is credited based on current rates, it's impossible to anticipate how much you'll earn from the policy itself. Therefore, in the event that the cash value begins to decrease, you will need to be ready, willing, and able to make further premium payments into the policy in order to keep the coverage in effect. It's never a good sign when there's not enough money to go around. On the other hand, if you have a higher income than you require, it may not be difficult to raise your premiums on universal coverage. On the other hand, if you have accumulated a cash value, you have the ability to put your premium payments on hold or postpone them when money is tight. This is due to the fact that the policy will take out of the cash value the cost of the insurance as well as any other expenses. You do not have access to this choice when you purchase a standard whole-life policy. If you want to pursue some growth within your life insurance policy, based on variable interest rates, stock market benchmarks (like the S&P 500), or direct market investments, universal life may be the ideal choice for you. Everything hinges on the particular kind of universal life policy that one purchases. The success of the mutual-like subaccounts that the policyholder chooses to invest in will determine how much money the policyholder makes or loses. Those who have the stomach for risk may choose to invest in a variable life insurance policy. However, in the event that the accounts do not perform well, it is possible that additional premium payments will be required to keep the policy from expiring. If you are fortunate, the cash value of any universal life insurance policy can grow at an attractive rate. This is not guaranteed, though. When this occurs, you will have the option to pay lesser premiums, access a growing cash value through loans or withdrawals, or gift beneficiaries with a larger death benefit.All of One's Life
If you are looking for permanent insurance and desire a high level of assurance, whole life insurance may be the appropriate choice for you. When you purchase a whole-life policy, the premiums, death benefits, and cash value are frequently all predetermined. You are obligated to pay the required premiums, but as long as you do so, you are aware of the benefits that are accessible to you and your beneficiaries. If you don't like the thought of taking chances, whether that's hoping for high crediting rates or depending on investment returns, a whole life insurance policy can be the most comfortable option for you. This could be the situation if you require a life insurance payout that does not contain any surprises to provide for children who have special needs or if you have a business partner and need to fund a buyout when one of your partners passes away. Both of these scenarios could be applicable. It is important to keep in mind that increased predictability results in decreased flexibility. Even if the policy has a significant amount of cash value and you fail to make the required premium payments, the policy may become null and void. Whole life insurance is not capable of deducting premium payments from the cash value, as opposed to universal life insurance, which is designed to do so. There is, however, a workaround for this problem: If you have a whole life insurance policy, you might be able to buy a rider called an automatic loan provision (APL) that will activate in the event that you fall behind on your payments and take the necessary sums from your cash value.Options aside from Whole and Universal Life Insurance
Term life insurance is a great alternative to permanent policies to consider if you don't think you'll ever need permanent coverage for your insurance needs. When you get term insurance, you commit to providing coverage for a predetermined period of time (15 or 30 years, for example). You are protected for as long as you continue to pay the premiums or until the term expires, whichever comes first, but if you no longer require protection, you are free to cease paying the charges. Because there is no requirement to accumulate a cash value, the premiums for term life insurance are typically less expensive than the rates for permanent life insurance (term policies have no cash value). However, term life insurance is not intended to cover you for the entirety of your life; rather, it is best suited for time-limited requirements, such as safeguarding a young family against the loss of a parent at a young age. If you have needs that are both short-term and long-term, you might think about getting a combination of term and permanent coverage. Temporary protection, such as guaranteeing that the mortgage is paid off, can be provided by term life insurance, while long-term protection can be provided by a permanent policy, even if it is of a smaller face value.