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

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Updated: May 22, 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 them depends on individual preferences for flexibility versus stability.

Key Takeaways

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

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

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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

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

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
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.

Whole life insurance features
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.

Cost of Universal Life Insurance vs. Whole 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?

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    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.

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    Universal Life Insurance

    Universal life insurance is generally cheaper than whole life insurance, since it has fewer guarantees and more flexibility. However, it’s more expensive than term life because it has some of the same extra features that whole life does, such as lifetime coverage, riders and cash value.

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Although universal whole life insurance tends to be cheaper than whole life insurance, its flexibility can make it more expensive. 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 them helps in choosing a policy that best aligns with your financial strategy and life goals.

Universal Life Insurance: Pros and Cons

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  • 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
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  • 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

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  • 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
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  • 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

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
Reasons to Choose Whole Life Insurance

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.

Compare Life Insurance Rates

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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?
How much does universal life insurance cost compared to whole life insurance?
Should I get universal or whole life insurance?

About Mandy Sleight

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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.