What Is the Difference between Whole Life and Universal Life Insurance?

Choosing life insurance[1] can be an emotional process and deciding between universal life insurance and whole may be confusing. The disposal of one’s estate to loved ones is not merely a matter of numbers and mathematics. After a life of hard work and facing all the tribulations that life brings, people want to know that their loved ones will be cared for adequately after they are gone.

In this article, we’re going to look at the differences between Whole Life Insurance and Universal Life Insurance, as well as cover which one might be a better option for you, depending on the circumstances of your life. Ultimately, this decision should be made after careful consideration based on the advice of a licensed insurance professional in your jurisdiction.

What is Whole Life Insurance?

Whole life insurance is the “traditional” life insurance. It is also sometimes called Straight Life Insurance or Ordinary Life Insurance.

Whole life insurance is a type of “permanent life insurance”—this means that it lasts for the policyholder’s entire lifetime as opposed to a fixed number of years as is the case with “term life insurance.”

Provided the policyholder kept up the premium payments, then the life insurance is paid out to a beneficiary or beneficiaries upon the policyholder’s death.

Whole life insurance has both a death benefit and a cash benefit. Savings can accumulate or be invested, and the policyholder is able to withdraw this cash during his or her lifetime. The policyholder can also borrow against this cash as needed.

What is Universal Life Insurance?

Universal Life Insurance is also a type of permanent life insurance, paying out benefits at death. This type of life insurance is sold predominantly in the USA.

The primary difference between Universal Life (UL) Insurance is that UL was created primarily for living benefits whereas Whole Life Insurance was created primarily for death benefits. It is easier to earn tax-deferred income with UL than it is with Whole Life.

The best way to understand UL is to look at its similarities and differences to Whole Life Insurance.

Similarities and differences between whole life insurance and universal life insurance

For both of these permanent life insurances, when you can cancel the life insurance, you receive its cash value minus any fees. The cash value of the policy is earned through paying more than the scheduled premiums, or by reinvesting dividends earned by the policy. The policy can also accumulate interest.

Policyholders can borrow against the policy’s cash value. But any outstanding loans are deducted from payouts upon the policyholder’s death.

A key difference between these two types of life insurance is that whole life insurance has fixed premiums while universal life insurance has flexible premiums, meaning that you can adjust the premium amounts up or down according to your desires. With Universal Life Insurance, you can also pay premiums any time you wish, not on a fixed schedule.

Money paid into a Universal Life Insurance account gets invested and any interest earned is tax-deferred. This adds cash to the account, which can be used to pay off premiums.

Because of Whole Life Insurance’s fixed premiums, the payout is guaranteed, and this can be an attractive option for people with dependents whom they want to ensure are cared for when the policyholder dies.

Because of the guarantees offered by Whole Life Insurance, this type of insurance is generally more expensive.

The primary attraction of Universal Life Insurance is its flexibility. It is possible to change the insurance’s coverage value without having to cancel it. This makes it an attractive option for people whose circumstances change often.

With Universal Life Insurance, it is even possible to stop premium payments altogether should you enter hard times. You could pay $200,000 one day and then pay nothing for 10 years.

The primary con of Universal Life Insurance is that the returns are not guaranteed, fees are high, and there might be surrender charges whenever you withdraw money or if you wish to cancel the policy altogether.

Should you choose Whole Life Insurance or Universal Life Insurance?

Knowing which Life Insurance to choose has a lot to do with:

• You risk tolerance
• Your family structure
• Your financial stability
• How large your estate is
• Your financial goals

Whole Life Insurance and Universal Life Insurance are also not the only options on the market. There is also Group Life Insurance—a life insurance policy offered by an employer to employees—and term life insurance.

In some cases, it might even be better to skip life insurance altogether and rather invest in a slow-earning, low-risk portfolio of stocks and bonds.

Seeking the advice of an investment professional

Because of all the choices available, people will often seek the advice of an investment professional to help them decide on the best instrument to help them either (a) earn reduced-tax or no-tax income during their retirement or (b) secure the highest possible return for their loved ones upon their death.

Whenever seeking advice from such a professional, it is vital to ensure that he or she is in good standing with whatever regulatory body they must subscribe to, such as FINRA[2], the SEC, or another industry-specific body.

As a rule of thumb, investment and finance professionals must always be entirely transparent when advising you regarding your money. They are obligated to provide you with full and complete information in a way that you can understand so that you can make the best possible decision with your finances.

If you feel you have been misadvised regarding which type of life insurance you should get, you might want to seek the advice of a competent life insurance attorney[3].