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Whole vs. universal life insurance
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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.
The fact that life insurance uses all-encompassing terms like “whole” and “universal” only adds to the gravity of the decision. It’s not just about picking a policy. It’s about choosing a financial safety net that could last a lifetime. Given the consequential nature of this decision, Bankrate has created this life insurance guide to help lift the weight off your shoulders. We’ll break down the key differences between whole and universal life insurance so you can confidently choose the option that best fits your financial goals and needs.
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Whole life insurance combines life insurance with an investment component.
- Coverage for life
- Tax-deferred savings benefit if premiums are paid
- 3 variations of permanent insurance: whole life, universal life and variable life include investment component
Term life insurance is precisely what the name implies: an insurance policy that is good for a specific term of time.
- Fixed premium over term
- No savings benefits
- Outliving policy or policy cancellation results in no money back
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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.
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. Putting it simply, whole life insurance may appeal to those who prioritize security and predictability, while universal life insurance might be better for those who prefer more flexibility and are comfortable with some level of risk.
You may already have an idea of what type of life insurance policy you would lean toward based on those general definitions. That said, let’s discuss the differences between whole life vs. universal life insurance in a little more detail so you can confidently decide which option best fits your financial goals and needs.
| 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 is a stable option that offers lifelong protection, usually up to a maximum age of 95 to 121. Your premiums stay the same, so you won’t have to worry about adjusting your budget due to any sudden rate hikes. This same level of reliability extends to your policy’s cash value, which earns a guaranteed interest rate, ensuring it grows at a predictable pace no matter what happens in the market. Some whole life insurance policies can also earn dividends.
You can access a whole life insurance policy’s cash value through policy loans while you’re still alive. 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.
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 or loan balances. 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
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Guaranteed cash value growth: The cash value component steadily increases over time with a guaranteed interest rate. This provides a predictable, stable way to build financial reserves within your policy.
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Fixed premiums: Your premium payments are locked in for life, so you’ll never have to worry about unexpected increases as you age.
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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.
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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.
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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.
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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.
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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.
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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 that offers lifelong coverage up to the typical age limit of 95 to 121. However, when compared to whole life insurance, universal life insurance has distinct flexibility and variability that policyholders can potentially leverage to suit their changing financial needs.
With universal life insurance, 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. However, there is a guaranteed minimum rate, though it primarily serves as a safety net rather than an indicator of actual growth. In most cases, universal life policies are credited with higher interest rates than whole life insurance, giving them the potential for faster cash value growth.
Policyholders of universal life 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. Direct withdrawals, while convenient, permanently reduce the death benefit and may have tax implications.
Pros and cons of universal life
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Premium flexibility: Universal life insurance allows policyholders to adjust their premium payments, making it easier to manage costs during different financial periods.
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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.
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Adjustable death benefit: Policyholders can increase or decrease the death benefit as their needs change, though this may require a medical exam.
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Access to cash value: You can borrow or withdraw funds from the cash value, offering financial flexibility during your lifetime.
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Premiums may increase over time: Especially if only minimum premiums are paid, costs can rise as you age due to increasing mortality charges.
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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.
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Complex fees: Universal life policies often come with more fees, including those for managing the cash value and policy adjustments.
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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.
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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
