Universal Life Insurance vs. Whole Life Insurance: What’s the Difference and Which One Should You Get?

Name: Universal Life Insurance vs. Whole Life Insurance: What’s the Difference and Which One Should You Get?
Item: Universal Life Insurance vs. Whole Life Insurance: What’s the Difference and Which One Should You Get?
Author: Mandy Sleight

Universal and whole life insurance are two types of permanent life insurance policies. The key difference is that universal life provides more control over the policy and flexibility to make changes as life situations occur.

By Mandy Sleight

Reviewed by Mark Fitzpatrick

Edited by Rae Osborn

Updated: October 18, 2024

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Universal life insurance and whole life insurance are distinct forms of permanent life insurance. They differ from term life insurance, which only offers temporary coverage for a predetermined number of years and has no cash value option. Both types provide lifetime coverage and a cash value savings account component built into the policy.

Universal life insurance offers flexibility and control over policy terms, making it suitable for those seeking adjustable coverage. Whole life insurance provides stable, guaranteed benefits, appealing to those who prefer predictability. Choosing between universal life vs. whole life insurance depends on individual preferences for flexibility versus stability.

TABLE OF CONTENTS

What's the Difference Between Universal and Whole Life Insurance?
Cost of Universal Life Insurance vs. Whole Life Insurance
Universal vs. Whole Life Insurance: Pros and Cons
Should You Get Universal or Whole Life Insurance?
FAQ About Universal vs. Whole Life Insurance

Key Takeaways

Both universal and whole life insurance are types of permanent life insurance offering lifelong coverage, but they differ in premium flexibility and investment options.

Universal life insurance offers adjustable premiums and death benefits, ideal for those seeking flexibility and control over their policy's terms.

Whole life insurance features fixed premiums and guaranteed benefits, well-suited for individuals desiring stability and predictable long-term financial planning.

What Is the Difference Between Universal and Whole Life Insurance?

The difference between whole life and universal life insurance is the rigidity of the policy. Once a whole life policy is issued, the coverage amount, premium and cash value interest rate stay the same for the policy's life. By contrast, the death benefit amount, premium and cash value interest rate of a universal life policy can change.

Universal vs. Whole Life Insurance

Universal Life Insurance

Flexible premiums
Flexible death benefit
Cash value interest rate can fluctuate
Does not offer dividends
Lifetime coverage is not guaranteed
Requires close monitoring to ensure policy doesn’t lapse

Whole Life Insurance

Premiums don’t change
Death benefit stays the same
Lifetime policy coverage
Guaranteed cash value interest rate
Eligible for dividends

The difference between whole life and universal life insurance is most apparent in their management. Universal life insurance may require more attention to maintain, whereas whole life insurance offers simplicity and ease of management.

In terms of policy specifics, the difference between universal life and whole life insurance revolves around the guarantee of benefits. Whole life insurance assures a death benefit and cash value growth, whereas universal life insurance does not, with the latter’s benefits potentially varying according to market conditions.

Understanding Permanent Life Insurance

Life insurance serves as a financial safeguard, offering security for your family and yourself. It involves an agreement with an insurance company, where the insurer pledges to pay a predetermined sum to a nominated beneficiary following your death, in exchange for ongoing premium payments.

One of the primary categories of life insurance is permanent life insurance, which includes policies like whole life and universal life insurance. Unlike term life insurance, which covers you for a specified term, permanent life insurance provides lifelong coverage and often includes a cash value component, making it a comprehensive financial planning tool.

Universal and whole life insurance share some similarities but differ in structure and flexibility. Both provide lasting protection, but to select the right policy for your financial journey, you'll need to understand their unique features:

Universal Life Insurance Features

Feature	Universal Life Insurance
Length of Coverage	The coverage length is flexible, meaning you can increase or decrease coverage as needed throughout the life of the policy. These changes can increase or decrease the length of policy coverage.
Cash Value	Although universal life insurance may have a guaranteed minimum interest rate, its earnings can fluctuate, depending on the policy. If the portfolio earns more interest, the policy will be credited the difference, allowing the cash value to grow faster than a similar whole life policy. However, in a down market, the insurer may use cash value to make up the difference.
Death Benefit	A death benefit is not guaranteed for the policy's life. You must make enough premium payments to keep the policy from lapsing, even if a no-lapse guarantee rider is included. Since you can adjust the death benefit, the amount that was initially taken out may differ from the death benefit amount the beneficiary receives.
Premium Over Time	Since the death benefit and other features can change during the policy duration, a universal life insurance premium can increase or decrease to match the changes made to the policy.
Dividend Eligibility	Although a universal life policy comes with flexibility and other features a whole life policy doesn’t have, one feature it does not offer is dividend eligibility, even if the insurer participates in dividends for other products.
Borrow or Withdraw Cash Value	Once a minimum threshold has been reached, you can borrow against or withdraw cash value. The cash value can also be used to pay premiums Taking out too much money could cause the policy to lapse.
Rider Eligibility	Universal life policies are eligible for riders, which depend on the company and policy type. For instance, a no-lapse guarantee rider can protect the policy from lapsing when changes occur, like interest rate fluctuations.
Use for Estate Planning	Although you can use universal life for estate planning, it might not be the best fit unless the policy is closely monitored, as factors can cause it to be underfunded and lapse without a no-lapse guarantee rider.

Whole life insurance features

Feature	Whole Life Insurance
Length of Coverage	As long as you pay premiums, whole life insurance coverage will last your lifetime.
Cash Value	Whole life insurance cash value has a guaranteed interest rate for the life of the policy. This rate will determine how fast the cash value grows while the policy is in effect.
Death Benefit	The death benefit is guaranteed to stay the same for the life of the policy, as long as premiums are paid. If the policy begins with a $100,000 death benefit, the beneficiary will receive a $100,000 death benefit when the insured dies.
Premium Over Time	A whole life insurance policy has a fixed premium that does not change over time. Each premium payment will be the same, from the first payment until the last payment.
Dividend Eligibility	Depending on the specific policy whole life insurance may earn dividends which can be paid as cash, fund cash value, buy more life insurance or pay premiums. Mutual insurance companies offering whole life insurance may offer dividends.
Borrow or Withdraw Cash Value	You can borrow or withdraw the policy's cash value. If the amount is not returned with interest, any outstanding balance will reduce the death benefit paid to the beneficiary.
Rider Eligibility	Whole life policies are eligible for riders, which can differ by product and insurer. One popular rider is the long-term care rider, which allows you to access part of the death benefit while still alive to pay for long-term care expenses.
Use for Estate Planning	A whole life policy can help pay for estate taxes, making it a popular part of estate planning for high-income earners.

Cost of Universal Life Insurance vs. Whole Life Insurance

One main difference between universal and whole life insurance is the premium rates. The average cost of universal life insurance tends to be lower compared to whole life insurance, but higher than term life insurance. Universal life insurance is cheaper than whole life insurance, but more expensive than term life insurance. Although life insurance rates depend on coverage amount, policy type and features and personal factors including age and health status, whole life may cost about 20 times more than term life.

Related: >> How Much Does Permanent Life Insurance Cost?

Whole Life Insurance

Whole life insurance can cost as much as 20 times more than term life insurance because it has more benefits, like permanent coverage that lasts a lifetime, dividends, riders and cash value.

Universal Life Insurance

Universal life insurance is generally cheaper than whole life insurance, since it has fewer guarantees and more flexibility. However, universal life insurance costs more than term life because it includes features similar to those of whole life, such as lifetime coverage, riders and cash value.

When comparing the costs of whole life insurance vs. universal life insurance, it's important to consider their distinctive features and benefits, which influence their pricing structures.

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Although base universal life insurance costs tend to be cheaper than whole life insurance, the potential costs due to its flexibility can accumulate. This can make it more expensive under certain conditions. For many, universal life is not the most suitable option, unless you have specific goals and are prepared to monitor the policy closely for fluctuations to avoid a lapse in coverage.

Universal vs. Whole Life Insurance: Pros and Cons

Each type of life insurance has unique advantages and limitations. Evaluating the pros and cons of universal life vs. whole life insurance helps in choosing a policy that best aligns with your financial strategy and life goals.

Universal Life Insurance: Pros and Cons

Pros

Flexibility in Premiums: Adjust premiums based on financial changes
Adjustable Coverage: Modify death benefits to suit evolving needs
Investment Control: Direct involvement in investment choices
Potential for Higher Returns: Possibility of greater returns based on market performance
Adaptability: Tailor policy to changing life circumstances

Cons

Market Dependence: Returns vary with market fluctuations
Active Management Required: Needs regular policy monitoring
No Dividend Payments: Lacks the potential for dividends
Risk of Policy Lapse: Inadequate funding can lead to policy termination

Whole Life Insurance: Pros and Cons

Pros

Guaranteed Benefits: Fixed death benefit and cash value growth
Stable Premiums: Premiums remain constant throughout policy life
Dividend Earning: Potential to earn dividends, enhancing value
Simple Management: Less need for active policy monitoring
Predictable Cash Value Growth: Steady, guaranteed cash value accumulation

Cons

Higher Premiums: Generally more expensive than universal life
Less Flexibility: Fixed premiums and death benefits
Limited Investment Control: Investments managed by the insurer
Slow Cash Value Growth: Steadier but slower cash accumulation

Choosing between whole life and universal life insurance hinges on individual preferences and circumstances. Each type aligns differently with personal financial strategies, emphasizing the importance of matching policy characteristics with individual financial goals.

Should You Get Universal or Whole Life Insurance?

If you are trying to decide which is better, universal or whole life insurance, the answer comes down to personal life insurance needs and goals for the policy. Universal life may be a better fit if you have a lower income, since it offers cheaper premiums.

If your income is higher, you may prefer whole life insurance, which has more expensive premiums. It’s smart to work with a life insurance expert or financial professional to decide if you should get universal or whole life insurance. There are several reasons one may be better than the other for you.

Reasons to Choose Universal Life Insurance

Universal life insurance may be a good fit if you have a lower income, if you:

Are risk-tolerant
Don’t need a guaranteed interest rate
Want premium and death benefit flexibility
Don’t care about dividends
Can monitor your policy to prevent a lapse

Reasons to Choose Whole Life Insurance

Whole life insurance may be a good fit if you have a higher income, if you:

Are risk-averse
Want guaranteed interest to predict cash value growth
Prefer locked-in premium and death benefit
Want a dividend option
Don’t want to monitor your policy
Anticipate a need for long-term care or supporting a lifelong dependent

Ultimately, whether you choose whole vs. universal life insurance should align with your risk tolerance, financial stability and life insurance needs. Both types can provide valuable coverage but cater to different financial strategies.

Although whole and universal life are both options for permanent coverage, many find that term life is a better fit. Not only is it cheaper, but buying term life insurance and investing the premium difference may be a more economical choice for cash value growth. Different term life companies offer different options for coverage.

If you decide that permanent life coverage is your best fit, we can help you find the best whole life and best universal life insurance companies for this type of coverage.

How to Get Whole or Universal Life Insurance

Deciding whether to choose whole life or universal life insurance involves careful consideration of your long-term financial needs and personal circumstances. This step-by-step guide will help you navigate the process of selecting and obtaining the right type of life insurance.

Evaluate Insurance Providers

For Whole Life Insurance: Start by researching insurers specializing in long-term investment products. Whole life insurance is typically straightforward to obtain, featuring fixed premiums and a clear policy structure.
For Universal Life Insurance: Look for insurers that offer flexible policy options. Universal life insurance allows you to adjust premiums and coverage as your financial situation changes, making it suitable for those with variable incomes or who desire greater control over their financial planning.

Compare Insurance Offers

For Whole Life Insurance: Since the structure is more straightforward, focus on comparing the long-term benefits and stability of the offerings.
For Universal Life Insurance: Compare offers from different insurers to find the best balance of cost, flexibility and potential returns. Ensure that the plan allows for adjustments to premiums and benefits to suit your changing needs.

Consult with Financial Advisors

Consider engaging a financial advisor or insurance specialist to delve into the specifics of universal vs. whole life insurance. Understanding the difference between whole and universal life insurance is important, especially regarding cost implications, cash value accumulation and how each aligns with your estate planning needs.

Undergo Risk Assessments

Prepare for and undergo a risk assessment, which may include a medical examination. Insurers will evaluate factors such as your age, health and financial history to determine risk and establish your premium rates.

Select and Apply for a Policy

Choose the policy that best meets your financial and security goals based on the information and advice received. Complete the application process, which may include further documentation and finalizing your premium schedule based on the insurer's assessments.

Regularly Review and Adjust Your Policy (If Necessary)

It's important to regularly review and potentially adjust your policy in response to changes in your financial situation or goals.

FAQ About Universal vs. Whole Life Insurance

MoneyGeek answers the most common questions about universal life vs. whole life insurance.

What is the difference between universal and whole life insurance?

The differences between whole and universal life include cost, features and flexibility. Whole life offers a guaranteed death benefit, premiums and cash value interest rate. Universal life provides flexibility, so you can change the death benefit and premiums as your needs change, but interest rates aren’t guaranteed like with whole life.

Which policy feature makes a universal life policy different from a whole life policy?

The flexibility in premiums and death benefits makes universal life insurance different from whole life insurance, allowing for adjustments based on financial changes.

How much does universal life insurance cost compared to whole life insurance?

Compared to whole life, universal life insurance is usually cheaper for the same coverage. Universal life does have fixed premiums like whole life, but only if you don’t make changes. The premium can fluctuate based on policy features or if you increase or decrease the death benefit amount.

Why is universal life cheaper than whole life?

Universal life insurance is generally cheaper than whole life insurance because it offers fewer guarantees and requires more active management, which reduces the insurer's risk.

Should I get universal or whole life insurance?

Whether you should get universal or whole life insurance is a personal choice. Discussing your needs and goals with a financial professional can help you determine which policy is best for your individual situation.

Which is better whole life or universal life?

Whether whole life or universal life insurance is better depends on your financial stability and preference for flexibility versus predictability. Whole life insurance offers stability, while universal life insurance offers adaptability.

Is universal life insurance term or whole?

Universal life insurance is neither term life insurance nor whole life insurance. It's a different type of policy that offers flexible coverage that can adjust to your life changes.

Is universal life insurance permanent?

Yes, universal life insurance is a form of permanent life insurance that provides lifelong coverage and includes a savings element that can grow or decrease based on policy management.

About Mandy Sleight

Mandy Sleight is a licensed property, casualty, life and health insurance agent with 20 years of experience in the industry. She has worked for major insurance companies like State Farm and Nationwide, and most recently as the Operations Coordinator for a startup employee benefits company.

Sleight holds a business administration and management degree from the University of Baltimore and a master's in business administration from Southern New Hampshire University. She uses her vast knowledge of insurance and personal finance to create easy-to-understand and engaging content to help readers make smarter choices with their budgets and finances.

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