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Whole vs. universal life insurance

Updated Nov 13, 2024

Key takeaways

  • Universal and whole life insurance are both permanent policies that can offer lifelong coverage, but each has distinct benefits and drawbacks, depending on your financial goals.
  • Whole life insurance provides more predictable benefits with fixed premiums and guaranteed cash value growth, making it a stable but often more expensive choice compared to universal life insurance.
  • Universal life insurance offers greater flexibility in premium payments and death benefits, with the potential for higher returns, but requires careful management to avoid lapses in coverage.

Understanding the complexities of life insurance can be overwhelming, especially when faced with decisions between options like "whole life" and "universal life." These terms can add to the confusion, making it difficult to determine which policy best suits your needs and goals. Both types can offer lifelong coverage and a cash value component, but the differences between them can make one a better fit for your unique situation. Whole life insurance is often chosen for its stability, offering predictable premiums and a steady growth of cash value. On the other hand, universal life (UL) insurance stands out for its flexibility, allowing you to adjust your premiums and death benefit and potentially grow your cash value more rapidly.

In this article, we’ll break down these two popular types of life insurance in a way that’s easy to understand, so you can make a confident, informed decision that aligns with your financial goals and your life’s needs. Whether you’re looking for something straightforward or a policy with more control, we’ll help you figure out which path is right for you.

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This advertising widget is powered by HomeInsurance.com, a licensed insurance producer (NPN: 8781838) and a corporate affiliate of Bankrate. The offers and clickable links that appear on this advertisement are from companies that compensate Homeinsurance.com LLC in different ways. The compensation received and other factors, such as your location, may impact what ads and links appear, and how, where, and in what order they appear. While we seek to provide a wide range of offers, we do not include every product or service that may be available to you as a consumer. We strive to keep our information accurate and up-to-date, but some information may not be current. Your actual offer terms from an advertiser may be different than the offer terms on this widget. All offers may be subject to additional terms and conditions of the advertiser.

This advertising widget is powered by HomeInsurance.com, a licensed insurance producer (NPN: 8781838) and a corporate affiliate of Bankrate. HomeInsurance.com LLC services are only available in states where it is licensed and insurance coverage through HomeInsurance.com may not be available in all states. All insurance products are governed by the terms in the applicable insurance policy, and all related decisions (such as approval for coverage, premiums, commissions and fees) and policy obligations are the sole responsibility of the underwriting insurer. The information on this site does not modify any insurance policy terms in any way.

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Whole life vs. universal life

Choosing the right life insurance policy, whether it's whole life or universal life, can feel overwhelming, especially if you're new to the topic. But understanding the basics doesn't have to be complicated. Let's simplify the differences between whole life vs. universal life insurance, so you can confidently decide which option best fits your financial goals and needs.

Whole life insurance: Whole life insurance is often considered the stable and predictable choice. It offers consistent growth over time, so you know exactly what to expect throughout the life of the policy. The cash value of your whole life policy earns a guaranteed interest rate, which means it increases at a predictable pace, no matter what happens in the market. This makes it an appealing option for those who prefer stability. Additionally, whole life insurance comes with fixed premiums and a guaranteed death benefit, which can give you peace of mind knowing that your coverage will last your entire life — usually up to a maximum age of 95 to 121. Plus, you can borrow against the cash value if you ever need access to funds, providing a financial cushion during tough times. Participating whole life insurance policies can also earn dividends.

Universal life insurance: If whole life insurance is the steady choice, universal life insurance is the more flexible option that adjusts with the ups and downs of life. Universal life policies also offer lifelong coverage, typically up to age 95 to 121, but with a twist. These policies allow you to adjust your premium payments and death benefit amounts over time, which can be incredibly helpful if your financial situation changes. The cash value in a universal life policy is typically credited with higher interest rates than whole life, which means it has the potential to grow faster. The interest earned can fluctuate over the years, but there is a guaranteed minimum interest rate. Like whole life, you can borrow against your cash value, but universal life goes a step further by allowing direct withdrawals, offering even more flexibility.

In essence, whole life insurance might be for those who value security and predictability, while universal life insurance can appeal to those who want more control and are comfortable with a bit of risk. Whether you’re looking for a safe harbor or a flexible plan that grows with you, understanding these options can help you make an informed choice.

Policy attribute Whole life Universal life
Length Permanent Permanent
Cash value Yes Yes
Cash value growth Fixed/capped Varies based on the credited interest rate set by the insurer
Flexible premium No Yes
Flexible death benefit No Yes

Whole life insurance

Whole life insurance offers lifelong protection with a few added perks, making it a stable choice for those who like predictability. Your premiums stay the same for life, meaning you won’t have to worry about sudden rate hikes down the road. It’s like that best friend that’s always there for you through thick and thin.

One of the unique features of whole life insurance is its cash value, which grows at a guaranteed rate over time. You can tap into this cash value through loans, using the money when you need it. But it’s important to point out that, like any other loan, a life insurance policy loan accrues interest. Additionally, any loan amount you don’t repay will reduce the death benefit your loved ones receive. Also, some policies even offer dividends, adding a little extra boost to your cash value.

If you ever decide to part ways with your policy, you can access the surrender cash value — this is the money you’ve accumulated, minus any fees. Whole life insurance might cost a bit more, but it provides the peace of mind of knowing exactly what you’re getting, which can be invaluable in long-term planning.

Pros and cons of whole life insurance

Pros
  • Guaranteed cash value growth: The cash value component steadily increases over time with a minimum guaranteed interest rate. This provides a predictable, stable way to build financial reserves within your policy.

  • Fixed premiums: Your premium payments are locked in for life, so you’ll never have to worry about unexpected increases as you age.

  • Policy loans: You have the option to borrow against the cash value, offering a source of funds during your lifetime without the need to go through a bank. Just remember, unpaid loans plus accrued interest will reduce the death benefit.

  • Dividend potential: If you have a participating whole life policy, you may receive dividends, which can further grow your cash value or reduce your premiums.

Cons
  • Higher premiums: Whole life insurance can be expensive, especially for larger coverage amounts. This is particularly true if you’re purchasing the policy later in life.

  • Slow cash value growth: While the cash value grows at a guaranteed rate, it’s generally slower compared to other financial vehicles since it’s not a true investment tool, meaning it might not be the best option if you’re looking for rapid growth.

  • Surrender fees: If you decide to cancel your policy, you might face significant surrender fees, particularly if the policy is still relatively new. These fees can eat into the cash value you receive.

  • Long-term commitment: Whole life insurance can be expensive, and you need to be sure you’re comfortable with the lifelong costs since there are no refunds after the initial free look period.

Universal life insurance

Universal life insurance is another type of permanent life insurance — it offers more flexibility than whole life. It provides coverage for life, generally up to ages 95 to 121, and includes a cash value component that grows over time. The key difference lies in its flexibility: policyholders can adjust both their premiums and death benefits to suit their changing financial needs.

You have the option between a level death benefit, which remains constant, or an increasing death benefit that grows as your cash value increases — though this typically requires higher premiums. Universal life also allows you to pay premiums more flexibly after the first year, as long as your policy’s cash value covers the necessary insurance costs. This makes it ideal for those with unpredictable incomes or financial obligations.

The cash value in a universal life policy grows based on an interest rate set by the insurer. This interest rate can fluctuate over the years, but there is a guaranteed minimum rate. Policyholders can access the cash value through loans or withdrawals. Loans don’t reduce the death benefit as long as they’re repaid, but any outstanding loans will. Withdrawals, however, permanently reduce the death benefit and may have tax implications.

Universal life insurance’s combination of flexibility and growth potential makes it a versatile choice for those seeking lifelong coverage with adaptable financial options.

Pros and cons of universal life

Pros
  • Premium flexibility: Universal life insurance allows policyholders to adjust their premium payments, making it easier to manage costs during different financial periods.

  • Potentially lower cost: Depending on the policy structure, universal life can be more affordable than whole life insurance, particularly if cash value is used to offset premiums.

  • Adjustable death benefit: Policyholders can increase or decrease the death benefit as their needs change, though this may require a medical exam.

  • Access to cash value: You can borrow or withdraw funds from the cash value, offering financial flexibility during your lifetime.

Cons
  • Premiums may increase over time: Especially if only minimum premiums are paid, costs can rise as you age due to increasing mortality charges.

  • Can lapse without value: If the cash value is insufficient to cover the policy's loan balance, monthly deductions and any surrender charge, a UL policy can lapse, making policy reviews and monitoring important.

  • Complex fees: Universal life policies often come with more fees, including those for managing the cash value and policy adjustments.

  • Interest rate cap: Some forms of universal life policies, such as indexed UL, may have a cap on the interest rate, limiting potential gains, despite market performance.

  • No dividend payments: Unlike participating whole life policies, universal life policies generally do not offer dividends, potentially limiting growth compared to other options.

How do I choose between whole life and universal life?

When deciding between universal life insurance vs. whole life, it ultimately comes down to your preferences for flexibility and how much involvement you want in managing your policy. Both offer guaranteed death benefits and the ability to borrow against your policy’s cash value, but they cater to different needs.

If you’re looking for a straightforward, low-maintenance option, whole life insurance is often the better choice. It provides stable premiums, a guaranteed death benefit and predictable growth of cash value over time. It’s a set-it-and-forget-it approach that appeals to those who prefer simplicity and reliability.

On the other hand, universal life insurance offers more flexibility, allowing you to adjust premiums and death benefits as your financial situation changes. However, this flexibility requires more active monitoring and comes with varying degrees of risk.

In the end, choosing between universal vs. whole life insurance should reflect your comfort with risk, your need for flexibility, and your desire to be involved in managing your policy over the long term. As always, consulting with an experienced licensed life insurance agent can help you navigate these options and determine the best life insurance provider to fit your needs.

Frequently asked questions

Written by
Ashlyn Brooks
Writer II, Insurance
Ashlyn Brooks is a finance writer with more than half a decade of experience, known for her knowledge in areas such as taxes, insurance, investing, retirement, finance news, and banking products.
Edited by Editor II, Insurance
Reviewed by Expert Reviewer, CLU, LA, CPFFE