Whole Life vs. Universal Life Insurance: What's the Difference?

​Whole life and universal life insurance are two popular types of permanent life insurance policies. That is, they are intended to extend coverage for life, or for far beyond the coverage available under a term life policy.

​Both types of policies share these key characteristics of life insurance:

• They provide a tax-free death benefit to widows, orphans and other beneficiaries.
• They are designed to last many years longer than a term insurance policy.
• Unlike term insurance, whole and universal life policies build cash value. Policy owners can access at any time and use for any purpose.
• Cash value grows tax-free while the policy remains in force. (If you cancel the policy and cash out, you would pay capital gains tax on any proceeds over what you paid in).
• Both qualify for tax-free exchanges to another life insurance policy, or an annuity.

 
Differences
But there are important differences between the two types of policies, as well - mostly in the different guarantees under each type of contract.

Whole life insurance typically provides for more stability and guarantees. But the initial premium commitment may be higher.
 
Whole life

• Guaranteed-level premium for life
• Must pay premiums as scheduled
• Guaranteed cash value growth rate
• Can be 'guaranteed paid up' at a certain age
• Fixed, with no risk of market loss.

 
Universal life

• Cost of insurance goes up over time
• Flexible premiums and payment
• Cash value growth rate fluctuates
• "No-lapse guarantee" riders available - for higher premiums
• Can be fixed or variable. Variable universal life insurance subaccounts may lose money.

 
Universal life advantages
Universal life policies offer flexible premiums. You can contribute premium when you like.

Consider paying extra premium in good times to fuel the policy's cash value and stay ahead of the rising cost of insurance as you age. That provides the flexibility to contribute less during lean times, if need be.

Universal life insurance may also allow for faster build-up of cash value for living benefits, such as tax-advantaged retirement income, college funding, etc., compared to whole life — especially if you can overfund the policy during the early years.
 
Universal life disadvantages
It's important to understand that under universal life contracts, the cost of insurance gradually increases as the insured gets older. Universal policies may require higher and higher premium payments to keep the policy in force.

If you don't pay the full premium, the carrier will deduct from the cash value each year to pay it, until the cash value is exhausted.

Many people have been caught by surprise when they learn a universal life insurance policy they expected to last a lifetime will lapse unless they contribute a large amount of premium to keep it in force.
 
To sum up…
Whole life insurance provides less flexibility. But it also provides for fewer surprises. Universal offers more flexibility and possibly more cash value growth - up to a point. Eventually, the rising cost of insurance takes its toll.
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In either case, it's a good idea to monitor any permanent life insurance policy carefully. Stay in touch with us and call us to review the status of your policy each year.