Whole Life Versus Universal Life Insurance

Purchasing life insurance is an important step towards safeguarding your family’s long term financial security. Once you have decided to purchase a life insurance policy, it’s now time to choose the right plan for your financial situation. In this piece, we look at whole life insurance versus.

The first decision that you will need to make about life insurance is whether you need term life insurance or permanent life insurance. The obvious difference between the two is that term life insurance policies will expire after a specified length of time. However, permanent life insurance policies will provide coverage for your entire life.

If you are considering permanent life insurance, then you have likely found that whole life insurance and universal life insurance are both common options. We will take a closer look at the similarities and differences of these plans. After learning more about each one, you will be able to make a more informed decision about your life insurance choice.

What is whole life insurance?

Whole life insurance is a type of permanent life insurance that offers the policyholder a fixed amount of coverage for their entire lifetime. The policy will build a cash value that you may be able to borrow from throughout the course of the policy. The cash value of whole life insurance policies will grow at a rate guaranteed by the insurance company with the potential for additional growth through dividends.

When you sign up for a whole life insurance policy, your monthly premiums will remain the same for the course of the policy. You will not experience any changes in your monthly premiums. The policy will have a guaranteed payout amount to your beneficiaries, provided you continue to pay your premiums.

With each premium payment, a portion will go towards covering the policy and another portion will build the cash value of the policy. With the cash value of the policy, you have the option to borrow from it or allow that cash to pay for the plan’s premiums once they’ve built up enough. If you choose not to use the accumulated cash in any way during your lifetime, then your beneficiaries will receive their portion of the cash as an addition to the face value.

Overall, this policy is very straightforward, and you know exactly what you are getting out of the policy when you sign up. Once you sign up there is very little flexibility in this type of policy.

What is universal life insurance?

Universal life insurance is another type of permanent life insurance that offers coverage for your entire lifetime. Universal life insurance policies also have the ability to build cash value over the
course of the policy.

With a universal life insurance policy, you will have access to flexible premiums that you may be able to adjust over the course of the policy. Each year, you can change how much you need to contribute based on the growing cash value of the policy.

The cash value of a universal life insurance policy is typically tied to market interest rates that will fluctuate over time. The purpose of this is to tie your cash value growth rate more closely to the market indexes, instead of a growth rate predetermined by the insurance company.

The accumulated cash is used to give you flexibility. Instead of paying a specified premium, the amount you are required to pay for the policy will change in relation to the interest rates of the market.

When interest rates are high, universal life insurance policies are very attractive because your premiums are lower than a comparable whole life insurance policy but you would be earning the same, or potentially higher, cash value.

However, when interest rates drop, universal life insurance policies will seem less attractive because your premiums will increase. Increasing premiums can potentially become unaffordable based on your particular situation.

Although you would have the option to allow your premium to be paid by the existing cash value, the death benefit may decrease significantly if you are unable to pay your higher premiums for too long.

What are the similarities between whole and universal life
insurance?

Whole life insurance and universal life insurance have a large number of similarities that you should be aware of. Understanding the common features between the plans will help you determine if either type of permanent life insurance is right for you.

Lifetime coverage

Both whole life insurance and universal life insurance offer coverage for your entire lifetime. Your coverage will not expire at any point unless you stop paying your premiums. The lifetime coverage can offer peace of mind for your loved ones throughout your entire life.

Cash value accumulation

Each plan offers a cash value component that can potentially grow over time. You may have the potential to borrow from this cash value over the course of your life with both plans. The growth of this cash value and how you are able to use it will depend on the details of your specific insurance policy.

What are the key differences between whole and universal life insurance?

Whole life insurance and universal life insurance have important differences that you need to be aware of before choosing a policy. Think carefully before choosing either policy.

Stable vs flexible premium payments

With whole life insurance, your premium payments will remain stable throughout the course of the policy. You will not be surprised by any fluctuations in your premium which can be an attractive feature for anyone that would like to keep their premium stable for budgeting purposes.

With universal life insurance, your premium will fluctuate over time in response to changes in market rates. When interest rates are higher, your premium will likely decrease but when interest rates are lower, your premium will likely increase. It is easy to be surprised by a fluctuating rate that could potentially become unaffordable for your situation.

Stable vs flexible death benefits

Many universal life insurance policies allow you to increase or decrease the death benefit of the policy. However, whole life insurance policies do not allow you to change the death benefit. Either of these choices could be valuable for a policyholder, but it will depend on your individual situation.

Interest payments

The interest payments that allow your cash value to grow are adjusted differently in each policy. Typically, universal life insurance policies adjust the interest rate on your potential growth monthly.

Whole life insurance policies typically only adjust your interest rate for potential growth on an annual basis. Due to this, universal life insurance policyholders could potentially see their cash grow at a faster rate than whole life insurance policyholders.

How your cash value grows

With a whole life insurance policy, the cash value of your plan will grow at an interest rate that is guaranteed by the insurance company. The cash value could potentially grow more with dividends that insurance company may or may not be able to pay out each year. These dividends are representative of a portion of the insurance company’s profits that are distributed to policyholders.

In contrast, the cash value associated with a universal life insurance policy is tied to the current interest rates that are connected to the policy. Although some universal life insurance policies offer a guaranteed minimum growth rate, others do not. Therefore, the growth of the cash component of your account is less predictable than the cash value associated with a whole life insurance policy.

Which is better for me and my family?

Although each of these policies offers benefits to its policyholders, you will only be able to choose one policy. The choice will depend on your specific financial situation and your personal preferences.

If you prefer predictable and stable payments that guarantee a certain payout to your beneficiaries, then whole life insurance is a good option for you. These policies lend themselves to policyholders that prefer to avoid risks and value a guarantee from the policy.

Universal life insurance policies are more flexible than whole life insurance policies, but that flexibility brings risk. You will have the ability to change the payout of the policy but your premium could fluctuate widely over the course of the policy. It can be difficult to budget for a universal life insurance policy due to this unpredictability, so if you are on a tight budget then this risk may be unnerving.

In the end, you need to choose between a policy that guarantees your premiums and growth rates, versus a plan that has the potential to fluctuate widely over the course of your policy. Think about the long-term needs of your family, your need for flexibility, and your ability to cope with a fluctuating rate.

Remember, both of these policies are considered permanent life insurance so it is a choice that you will live with for the rest of your life. Take the appropriate amount of time you need to think about this decision over carefully. If you are still uncertain about your decision, then it may be a good idea to seek guidance from a professional.

If you are looking for more information about possible life insurance options, reach out to us directly to receive a free quote.