Universal vs Whole Life Insurance: What Are The Differences?

To sustain this free service, we receive affiliate commissions via some of our links. This doesn’t affect rankings. Our review process.

Calculator and insurance rates on paper (text in image: Universal vs Whole Life Insurance)With so many types of life insurance available, how do you know which one is best for your budget and your long-term financial needs? Two of the most popular options are whole life insurance and universal life insurance. These two types of life insurance share some features, but there are some important differences you need to know.

Article Overview

Understanding Permanent Life Insurance

Compare Life Insurance Rates Quote BoxBoth universal and whole life insurance are types of permanent life insurance, rather than term life insurance. What’s the difference between permanent and term life? With term life insurance, you’re only guaranteed a death benefit within a specific length of time (the term of the policy). With permanent life insurance, however, you’re guaranteed a death benefit for your entire life — there’s no expiration date for the policy as long as you continue to pay your premiums.

The other major difference between term and permanent life insurance is the cash value component. Permanent life insurance, including both whole and universal, allows you to accumulate cash value (savings) over time that you can borrow against tax-free. Term life doesn’t offer this feature. However, the cash value feature of whole and universal policies makes the premiums higher than term life policies.

Compare Life Insurance Rates Of Top Providers

How Does Cash Value Work?

Every time you make a premium payment, part of the money goes towards the:

  • Cost of insurance — the amount needed to provide the death benefit
  • Fees — the cost for the insurance company to manage your policy
  • Cash value — a savings component within the life insurance policy

The portion of your premium payment that goes toward the cash value component sits in an account, which grows over time. As the cash value grows, you may access a portion of the cash value as a policy loan without affecting the death benefit.

Also, if you decide to surrender your insurance coverage early, you can receive the policy’s cash value (minus any surrender charges). However, if you keep the insurance in-force and do not surrender the policy keep in mind that upon your death, your beneficiaries will only receive the death benefit, not the cash value of your policy.

Universal vs Whole Life Insurance

Before we jump into the differences between whole life insurance vs universal life insurance, here are the basics to help you understand each type.

What Is Whole Life Insurance?

Whole life insurance is generally a better option for people who want fixed premium payments and fixed death benefit guarantees. While the premiums stay the same each month, with some policies you only have to pay for a pre-determined, limited time (until a certain age or a set number of years), other policies require premium payments up until death. Your beneficiaries are guaranteed a fixed amount of death benefits as long as you make all of your premium payments.

Key Features

  • Lasts for your lifetime
  • Guaranteed level premium payments (your payments won’t ever rise)
  • Cash value growth is tax-deferred
  • Cash value accumulates at a guaranteed rate
  • Some policies pay annual dividends
  • Guaranteed fixed death benefit

What Is Universal Life Insurance?

Universal life insurance, sometimes called adjustable life insurance, can be a better option for people who want more flexibility over their policy. This can be valuable if you need a policy to meet your changing financial needs across time.

With universal life, you can pay your premiums in varying amounts and at any time (within some limitations).  And you can also reduce your death benefit to lower your premiums if you find your situation has changed. Certain policy riders (or add-ons) will even allow you to increase the death benefit. These riders must be selected at the initial purchase of the policy. The cash value component is also different from a whole life policy. With whole life, the cash value accumulates at a fixed rate, but with most universal life policies, it accumulates at a rate tied to market or interest rate indexes.

Key Features

  • Policy can last for your lifetime.
  • Policy has flexible premium payment options.
  • Cash value growth is tied to current market interest rates.
  • Cash value growth is tax-deferred.
  • Most policies give you the ability to reduce the death benefit to boost the cash value (or vice versa).

A Summary Of Key Differences

The overall difference between whole life insurance and universal life insurance is the flexibility you get with a universal life policy. But with this flexibility comes a greater potential risk that you won’t end up with the death benefit that you initially expected when you first purchased your policy.

Premiums

Whole life insurance can be more expensive than universal because you’re paying set premiums for a specific amount of time to be able to fund the death benefit. Universal life lets you adjust your payments to meet your current financial situation. However, whole life premiums are guaranteed not to rise for the duration of your payments. Since universal life premium payments are tied to market rates, your payment amounts can fluctuate.

Premiums are also typically less expensive for universal policies because you’re assuming part of the risk as opposed to a whole life policy, which the insurance company guarantees.

Death Benefits

Whole life insurance is a safer option if you want a guaranteed fixed death benefit. As long as you don’t let your policy lapse, your beneficiaries will receive the full benefit amount upon your death.

Cash Values

The major difference here is how the cash value of your policy accumulates. With a whole life policy, the cash value accumulates at a guaranteed rate for the duration of your policy. The cash value component of a universal life policy is usually based on market interest rates, so it can fluctuate.

You can use your cash value accumulation to pay premiums with a universal life policy, but the risk of doing so is that you have to carefully monitor your cash value — if you deplete your cash value or it falls too low, you could lose your insurance coverage. But some people may prefer this financial flexibility for premium payments.

Comparison Table

As we detailed above, here are the features and benefits of universal life insurance vs whole life compared side-by-side.

 WholeUniversal
Lasts For LifetimeCheckmarkCheckmark
Cash Value ComponentCheckmarkCheckmark
Death BenefitsFixedVariable
Premium AmountsFixedVariable
Can Borrow Against Cash ValueCheckmarkCheckmark
Cash Value InterestFixedVariable
Can Pay Premiums With Cash ValueCheckmark
Potential Annual DividendsCheckmark

Finding The Ideal Policy

Are you still unsure whether whole or universal life insurance is best for your needs? Be sure to read our guide to all of your life insurance options, where we cover additional options like term life and variable life insurance. We also give you tips on how to determine the ideal amount of life insurance you’ll need and how to find life insurance that meets your budget.

Do you find the flexibility of a universal life insurance policy a promising or risky option?

About The Author:

While attending the University of North Carolina at Chapel Hill’s graduate school for journalism and public relations, Sally began a long career researching and writing about hard-to-understand topics, such as insurance and finance.

Her additional experience in marketing, fundraising, public relations and financial planning at various foundations and nonprofit organizations over the years has given her the practical tools to inform consumers about making the smartest business and personal financial decisions.

Speaking of smart living — growing up in the (at-the-time) per-capita murder capital of the U.S. (Richmond, VA) taught her a thing or two about the need for personal and home safety. Sally stays on top of all the latest gadgets and services to protect her and her teenage daughters from potential predators and thieves. And she brings this knowledge to every article she writes.

Disclaimer: Information regarding insurance company offerings, pricing, and other contract details are subject to change by the insurance company at any time and are not under the control of this website. Information published on this website is intended for reference use only. Please review your policy carefully before signing up for a new insurance contract or any other contract as your unique circumstances will differ from those that may be used for example purposes in this article.

Disclaimer: This website contains reviews, opinions and information regarding products and services manufactured or provided by third parties. We are not responsible in any way for such products and services, and nothing contained here should be construed as a guarantee of the functionality, utility, safety or reliability of any product or services reviewed or discussed. Please follow the directions provided by the manufacturer or service provider when using any product or service reviewed or discussed on this website.

Subscribe
Notify of
0 Comments
Inline Feedbacks
View all comments