Whole life insurance helps with long-term goals, since it provides individuals with consistent premiums and guaranteed cash value accumulation. Universal life insurance gives consumers flexibility in premium payments, death benefits and the savings component of their policy.
Investopedia’s recent article, “Whole Life vs. Universal Life Insurance,“ explains that these two types of life insurance fall in the category of permanent life insurance. In contrast to term insurance, which guarantees a death benefit payout during a specified period, permanent policies provide lifetime coverage. If you want to cancel your permanent life policy, you’ll get the policy’s cash. These policies are typically made up of two parts: a savings or investment part and an insurance part. Their premiums are higher than normal policies, and insureds can also take out a loan, by borrowing against the cash value. Thus, permanent life insurance is also called as cash-value insurance.
Whole life insurance covers you as long as you’re alive. You must pay the same premium for a specific period to get the death benefit. This policy usually stays intact for the rest of your life, no matter how long you may live. This policy is good for long-term responsibilities, such as a surviving spouse’s income needs and post-death expenses.
One of its features is that it combines coverage with savings. Therefore, you may have to pay higher premiums at the start, when compared to a term life insurance policy.
The insurance company deposits some of your money into a high-interest bank account. With every premium payment, your cash value increases. This savings part of your policy grows your cash value on a tax-deferred basis. You can also choose to take part in the surplus of your insurance company and receive annual dividends. You again have the choice to either receive the dividends in cash or allow them to accumulate interest. You can also use your dividends to reduce your policy’s premiums or buy more coverage.
Universal life insurance is also called “adjustable life insurance,” because it has more flexibility compared to whole life insurance. You can decrease or increase your death benefit and pay your premiums at any time in any amount (with certain limits) after your first premium payment has been made. With this type of policy, you can increase the face value of your insurance coverage. However, you must pass a medical examination to qualify for this. You can also decrease your coverage to a minimum amount, without surrendering your policy. Surrender charges may be applied against the cash value of your policy.
As far as the death benefit, there are two options: a fixed amount of death benefit or an increasing death benefit that is equal to the face value of your policy plus your cash value amount.
You also can change the amount and frequency of your premium payments. Therefore, you can increase your premiums or pay a lump sum, according to the specified limit in the policy. Some of your premium minus the cost of insurance is again deposited into an investment account, and any interest accrued is credited to your account. The interest grows on a tax-deferred basis, which increases your cash value. You can decrease or stop your premiums to use your cash value to pay premiums in a financial hardship. You can also partially withdraw funds with universal life insurance.
The downside of universal life insurance is the interest rate: if the policy does well, there could be growth in a savings fund. However, a bad performance means the estimated returns are not earned. As a result, you pay higher premiums to get your cash-value account going. Surrender charges may also be imposed, when you terminate your policy or withdraw money from the account.
Universal life insurance can be great protection for your family, because of its security, flexibility and variety of investment options.
Reference: Investopedia (April 18, 2019) “Whole Life vs. Universal Life Insurance“