Whole life vs. universal life insurance (2024)

Whole life insurance and universal life insurance policies have several things in common, including lifelong coverage, a death benefit and a cash value account that grows tax-deferred. But there are also differences that could make one life insurance policy a better fit than the other. Understanding the differences can help you determine which policy type is best for your specific needs.

How does whole life insurance work?

Whole life insurance is the most common form of permanent life insurance, according to the Insurance Information Institute. It offers a guaranteed death benefit, cash value with a fixed interest rate for guaranteed and predictable growth and fixed premiums for the policy’s life.

Dividends

A participating whole life insurance policy from a mutual insurer may pay dividends, and you may have the option to use those dividends to buy more coverage.

“Annual dividends paid out by the insurance carrier can be used to buy paid-up additional death benefits or to apply against premiums due,” said Eleanor I. Johnson, founding principal at Highland Capital Brokerage.

Premium types

There are several payment options you can choose from: level, limited pay and single premium.

A level-premium whole life insurance policy requires regular, fixed payments until death or the policy maturity date, which usually ranges from ages 100 to 120. This is the most common option because premiums are spread out over years, though cash value is slow to grow.

A limited-pay whole life policy offers the same coverage in a shorter payment period. Instead of paying over a lifetime, you may pay for seven, 10, 15 or 20 years.

There’s also single-premium whole life, which requires one payment to pay the policy in full for life. The advantage is the cash value grows faster and is immediately available because you’ve funded it in full with your single payment.

Underwriting

In general, whole life policies require full underwriting, which includes an in-depth review of your personal and family medical history. Simplified issue whole life insurance doesn’t require a medical exam, but health questions are required in the application. Final expense and guaranteed issue are whole life policies with coverage amounts of around $50,000 or less and don’t require a medical exam.

Pros and cons of whole life insurance

Weighing the pros and cons of whole life insurance can help you decide if this type of policy is the right choice.

Pros

• Lifelong coverage: As long as you make your premium payments, the policy will last your entire life and pay a guaranteed death benefit to your beneficiary when you die.
• Guaranteed cash value growth: Part of your premiums go to your policy’s cash value account, which grows over time at a guaranteed interest rate.
• Can use the cash value growth while still alive: You can withdraw from or take a loan against the cash value, which you can use as supplemental retirement income or for long-term care costs. However, withdrawals may decrease your death benefit, and any loans you don’t pay back before your death will also reduce your policy’s death benefit.
• Can earn dividends: If your life insurance company pays dividends, you have several options for how to use them, including taking them as cash or using them to pay your premiums.

Cons

• Not flexible: You can’t change your death benefit or premiums once the policy is in force.
• Cash value grows slowly: The policy’s cash value grows slowly over time and usually isn’t accessible in the first few years unless you choose a limited or single-premium option.
• Borrowing against your cash value can lower the death benefit: If you borrow against your cash value and don’t pay off the loan before you die, it can reduce your beneficiary’s death benefit amount.
• Can be more expensive than universal life: Although the guarantees whole life insurance offers can be attractive, you may find that a universal life insurance policy with the same death benefit is cheaper.

How does universal life insurance work?

Universal life insurance policies provide a death benefit and premium flexibility, allowing the policy to change as you age and new life circ*mstances arise. For example, if you suffer a job loss and need to tighten your budget, you can temporarily use your money from your cash value account to cover some or all of your premium payments.

However, if your cash value zeros out, the policy may lapse, and you’ll no longer have life insurance coverage.

If you outlive your policy’s maturity date (usually age 95 or 100), you’ll likely receive a lump sum of cash equal to your cash value balance. If you die before and the policy is still in force, your beneficiary will receive the death benefit.

Types of universal life insurance

Outside of traditional universal life insurance, there are two other types that can speed up cash value growth but are higher risk:

• Variable universal life insurance: Your cash value is used for investments such as stock portfolios, and you get to choose the investment mix. While your cash value account could generate returns at a higher rate than, say, a whole life policy, it’s possible your cash value could decline if the markets underperform.
• Indexed universal life insurance: Like variable universal life, you don’t get to pick your stock market mix. Instead, the insurer invests the cash value in a stock index like the S&P 500.

Pros and cons of universal life insurance

It’s important to understand the pros and cons of universal life insurance to determine if it fits your individual needs.

Pros

• Flexible premiums: You can raise or lower your premiums based on your financial situation. In some cases, you can use your cash value balance to cover the cost of your premiums.
• Adjustable death benefit: You can raise or lower the death benefit as life circ*mstances change.
• Cash value access: You can withdraw the cash value or take out a loan to use while you’re still alive (but doing so may lower your death benefit).
• Coverage for life: As long as there is enough cash value or premium payments to keep the policy in force, the death benefit will be available to your beneficiary when you die.

Cons

• Can be complicated: Universal life has multiple moving parts, making it a more complex financial product than term or whole life insurance.
• Your policy could lapse: If your premiums aren’t enough to cover the cost of insurance or your cash value reaches $0, the policy could lapse.
• Returns are not guaranteed: Market performance and investment choices could cause cash value fluctuations if you choose indexed or variable universal life policies. It’s possible that your cash value balance could slow down because of stock market conditions.
• Usually more expensive than term life insurance: Because universal life policies have a cash value component, premiums tend to be higher than what you’d pay for a term life policy with an equivalent death benefit.

Whole life vs. universal life insurance costs

Life insurance costs vary significantly depending on several factors, such as:

• The coverage amount
• Type of permanent life insurance policy you choose
• Your age and health history
• Family medical history
• Policy add-ons, such as accelerated death benefits and other riders
• The insurer

In general, whole life insurance costs more than universal life insurance because of the guarantees and potential to earn dividends, in some cases.

Discussing your financial goals and individual needs for life insurance with a knowledgeable licensed insurance agent or financial advisor can help you decide between universal life and whole life insurance.

How to choose between whole and universal life

First, determine how much life insurance you need. Then, figure out how much money you can pay towards premiums.

After that, nail down your life insurance policy goals and your risk tolerance. You can build cash value faster with an indexed or variable universal life than whole life insurance, but you’re also subject to slowed cash value growth depending on the market.

People who want guarantees may want to consider whole life insurance. For those who prefer flexibility and are confident enough in their investment knowledge to risk their cash value account, universal life insurance may be a better fit.

Frequently asked questions (FAQs)