Universal vs. Whole Life Insurance: Choosing the Right Policy for Your Needs

Life insurance is a critical tool for protecting your loved ones and securing their financial future. However, navigating the various types of policies can be daunting. Life insurance is not a one-size-fits-all product. Which policy you choose depends on your financial situation, age, health and preferences. Some people like coverage with guarantees. Some prefer flexibility when it comes to premiums and benefits. And others simply want death benefit protection. Because your needs and goals are unique, you want to select a life insurance policy that can address your needs, help you reach your goals and fit within your budget. When considering permanent life insurance, two primary options emerge: universal life (UL) and whole life insurance. Understanding the nuances of each is essential to making an informed decision that aligns with your financial goals and risk tolerance.

Understanding Permanent Life Insurance

There are two main types of life insurance: permanent and term. And there are different kinds of policies in each of those categories. With permanent life insurance, two options available to you are universal life (UL) and whole life insurance.

Unlike term life insurance, which offers death benefit protection only during the policy term, universal and whole life insurance offer lifelong financial protection. Once you’re approved for a policy, and as long as you pay the required premiums, your beneficiaries will receive a payout someday. Universal life and whole life policies also allow you to accrue cash value, which can be a source of cash in the future via a policy loan-no approval needed1. Your death benefit will be reduced by the amount of the loan plus interest until it is repaid. You can use the money to supplement your retirement income or spend it as you like.

Both whole life and universal life are permanent life insurance policies, which are intended to last a lifetime. One type does not last longer than the other. You can fund a life insurance trust with either whole life or universal life. Whole life is a more common choice due to its guarantees. Establishing a trust that a whole life policy will fund allows you to plan your trust terms more effectively because you know the amount that will go into it. However, the premiums for whole life are generally twice that of universal life.

Key Similarities Between Universal and Whole Life Insurance

Since universal and whole life insurance are permanent policies, they share some common features and benefits. They also accumulate cash value that you can withdraw from or borrow against.

Lifelong Coverage: Both universal and whole life insurance policies last for your lifetime, as long as you're up to date on premium payments.
Cash Value Accumulation: Both policy types build cash value over time, providing a living benefit that can be accessed during the policyholder's lifetime. The cash value of a life insurance policy is an important way to save for the future, providing a safety net during life. You can borrow against the cash value of your policy to pay for unexpected expenses, allowing you to be better prepared for whatever lies ahead2. Accessing the cash value will reduce the available cash surrender value and the death benefit. With whole life, the cash value of your policy grows tax deferred. This valuable asset can be used whenever you need it, for whatever you choose.

Core Differences: Whole Life vs. Universal Life Insurance

While both policy types offer permanent coverage and cash value, their structures, flexibility, and risk profiles differ significantly.

Stability vs. Flexibility

Whole life insurance can offer you more stability because it has built-in guarantees. Your premiums and death benefit are guaranteed to remain the same for the life of your policy. Whole life insurance also offers guaranteed cash value growth. And any dividends2 can allow your death benefit to grow and allow your cash value to grow more quickly than what’s guaranteed.

In comparison, universal life insurance has more flexibility. With a universal life insurance policy, you can make adjustments to your premium payments and your death benefit to accommodate your changing needs and financial situation.

Whole Life: This policy offers guaranteed level premiums, a guaranteed death benefit, and guaranteed cash value growth. It provides a predictable and stable financial tool. With whole life, your premiums are fixed and guaranteed never to rise1. As long as you continue to pay them, you can count on the life insurance benefits being paid to your beneficiaries. Whole life has a guaranteed death benefit that will never decrease, as long as premiums are paid. Your family will always get the amount you set your policy for at minimum. Your premiums will also never change.
Universal Life: This policy offers flexibility in premium payments and death benefit amounts, allowing policyholders to adjust their coverage as their needs change. With universal life there are no fixed premiums and you have more flexibility on when you make payments. Universal life offers more control, but it requires oversight and doesn’t have a guaranteed death benefit. You can adjust your policy, and even your premiums (within limits), as your life changes.

Premium Structure

Whole Life: A whole life policy usually has a fixed premium that doesn't change over the life of the policy, otherwise known as a level premium. With whole life, your premiums are fixed and guaranteed never to rise.
Universal Life: By contrast, you can adjust the premium for a universal policy within certain limits. This can be useful if your financial circumstances change. However, if you lower premiums and the cash value declines enough, you may have to raise them again to keep the policy active.

Cash Value Growth

Cash valueWhole life and universal life policies accumulate cash value over time, but not at the same rate.

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Whole Life: Whole life policies frequently provide a guaranteed rate of return. Whole life insurance offers guaranteed cash value build up over the life of the policy.
Universal Life: The rates for universal life policies can change based on market conditions. As a result, a universal life policy has the potential for higher or lower returns than a whole life policy. For this reason, universal policies are typically cheaper. With a universal life policy, the cash value has an interest rate that's partially based on market conditions and will change over time. You'll have a guaranteed minimum interest rate, though.

Dividends

Whole Life: So-called "participating" whole life policies may earn dividends. You can accept these as cash payments, use them to pay premiums, or increase the policy's cash value. Not all insurers pay dividends on whole life policies, and for those that do, dividends aren't guaranteed. There’s also the potential for dividends to increase the amount of coverage over time. Dividends provide an opportunity for your policy to grow more over time. They can be used to pay premiums, add to the cash value, or even be taken as cash.
Universal Life: Universal life policies typically do not pay dividends.

Types of Universal Life Insurance

There are also different types of universal life insurance with different benefits.

Variable Universal Life (VUL): Variable universal life insurance’s (VUL) cash value is invested in the market via subaccounts chosen by you. These subaccounts may reflect a variety of asset types and account managers.
Indexed Universal Life (IUL): Another type of policy called indexed universal life insurance (IUL)3, is based on a market index and not the actual market. Its performance is based on the rules of the contract and not actual market performance, as it may have a cap on the maximum market rate or a floor on the lowest negative market rate. Even though IUL and VUL may potentially offer greater returns, the market risk and caps on IUL may have a negative impact on the cash value.

Who Are These Policies Best Suited For?

Whole Life: Whole life might appeal to you if you're seeking permanent coverage that has set premium payments and a fixed interest rate on the policy's cash value. Whole life insurance offers permanent, stable protection and access to cash value when you need it. Once you customize your policy to the benefits and premiums that fit your situation, it’s set.Whole life is a more common choice due to its guarantees. Establishing a trust that a whole life policy will fund allows you to plan your trust terms more effectively because you know the amount that will go into it.
Universal Life: Universal life policies are best if you want permanent coverage and a more hands-on approach to managing your life insurance policy. If flexibility is important, universal life (UL) insurance might be your permanent life insurance jackpot.Universal life insurance generally gives you the ability to fully customize your protection up-front and make adjustments down the road. There are many ways to configure your universal life policy. You can design your coverage to last for as little as fifteen years, for your lifetime, or somewhere in between.

Cost Considerations

Whole life may be more popular than universal life, but it’s also significantly more expensive. The premiums for whole life are generally twice that of universal life.

Converting Universal Life to Whole Life

Yes, if your definition of a conversion is moving the cash value from one policy to another without paying any taxes. This can be done via a 1035 exchange from the universal life policy to the whole life policy.

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