Whole Life vs Universal Life
What is best when it comes to Whole Life vs Universal Life? Well that all depends on what the life insurance is for and what your goals for the life insurance are.
In this article we will break down the pros and cons of whole life and universal life insurance. Hopefully by the end you will have a better understanding of each product and which one might best fit your situation.
Whole Life vs Universal Life Insurance: They Are Similar
Whole Life and Universal Life insurance are both permanent life insurance products. Permanent life insurance is made up of two main parts: cash value portion and the life insurance portion.
A part of your planned premium goes to pay the life insurance costs while the rest is invested into the cash value. You can use the cash value of permanent life insurance to pay the premium or you can take out loans/withdrawals.
Since permanent life insurance has cash value and lasts forever, the premiums can be quite pricey especially compared to term life insurance. Whole Life and Universal Life insurance can be used for:
- Income Replacement
- Business Loans
- Buy/Sell Agreements
- Final Expenses
- Infinite Banking
- Life Insurance Retirement Plan (LIRP)
- Special Needs Trust
What is Whole Life Insurance
When most consumers think about permanent life insurance, they think about whole life insurance. Whole life insurance is the most common type of permanent policy purchased.
The Advantages of Whole Life Insurance
- Premiums are guaranteed for life, regardless of economic conditions.
- You may be able to withdraw or take a loan against the cash value accumulated.
- The death benefit is guaranteed as long as premiums are paid.
Types of Whole Life Insurance
If you are looking into buying a whole life policy, you should first familiarize yourself with the 4 different types:
Non-Participating Whole Life
Non-Participating whole life insurance is the most basic whole life product offered. You have a set guaranteed premium and set guaranteed cash value that accumulates each year.
Participating Whole Life
Participating whole life insurance performs the same way as the non-participating whole life. Both come with guaranteed premium and guaranteed cash value.
The major difference is that a participating whole life product earns a dividend each year along with the guaranteed cash value.
Dividends can be withdrawn each year, left to accumulate, or used to buy extra life insurance. Dividends are based off the insurance carriers portfolio and are not guaranteed.
Final Expense Insurance
Final Expense Insurance is a non-participating whole life policy that offers coverage to seniors who have had some serious but not life threatening health issues. Face amounts for final expense insurance is usually limited $50K with age requirements between 45-85 years old.
Guaranteed Issue Whole Life Insurance
Guaranteed Issue Whole Life is also a non-participating whole life policy. These policies are designed for consumers who cannot qualify for any other type of life insurance.
It’s guaranteed issue which means no medical questions at all. Be wary, there is 2 year limited benefit, which means these policies only pay for accidental death the first 2 years. After 2 years, the policy pays the full benefit.
The Disadvantages of Whole Life Insurance
While having a guaranteed premium and cash value is advantageous, whole life does have a couple of major disadvantages. They are:
- Whole Life can be very expensive
- Limited Flexibility
What is Universal Life Insurance
Universal life insurance or sometimes referred to as adjustable life insurance is a permanent life insurance policy.
Just like whole life it has a cash value component and depending on which universal life product you choose, it could come with a guaranteed premium.
The way adjustable life insurance (universal life) works is that a portion of your planned premium pays for the cost of insurance.
The remaining amount is invested into the cash value. As the investment grows over time it could eventually be able to pay the cost of insurance, keeping your premiums the same or even eliminating them all together.
The Advantages of Universal Life Insurance
- Flexible Premiums
- Flexible Death Benefit
- Potential for higher returns on cash value
Types of Universal Life Insurance
Universal Life insurance is not a one size fits all product. There are 4 different universal life products to choose from. All these policies function the same, as explained above, except for how the interest on the cash value is accumulated.
Guaranteed Universal Life Insurance (GUL)
Guaranteed Universal Life insurance is the most like a whole life policy. GUL policies come with a guaranteed premium, guaranteed death benefit, and guaranteed interest (usually 3%) on the cash value. Guaranteed Universal Life insurance is usually about 35% less than a whole life policy would cost.
Before you get to excited, guaranteed universal life is not built for cash value accumulation. It is used as a low cost permanent life product. Even though the premiums are flexible you will want to make sure to pay the guaranteed premium to keep the policy from lapsing.
Whole Life vs Guaranteed Universal Life
Traditional Universal Life Insurance
Traditional universal life is a little different than GUL. First traditional UL doesn’t have a guaranteed premium, meaning the cash value needs to perform to keep premiums level.
The interest earned on the cash value of a traditional UL is declared each year on the policy’s anniversary date by the insurance carrier and is guaranteed for 1 year. There is a guaranteed minimum that comes with these policies (usually 2%).
Most consumers usually choose guaranteed universal life over traditional UL.
Whole Life vs Traditional Universal Life
Indexed Universal Life (IUL)
Indexed Universal Life or IUL is one of the most popular universal life products today. It’s unique interest crediting method makes it a great product to build cash value, without the risk of the market.
IUL policies credit annual interest based on certain stock indices. The interest that you can earn annually is capped (usually 10%-12%), but IUL policies also come with a floor, usually 0%. That’s right, their is no downside.
Indexed Universal Life insurance is not for everybody. They are great to use for life insurance retirement plans (LIRP). IUL policies allow you build significant cash value if funded properly while providing death protection for your loved ones.
Premiums are not guaranteed on IUL policies, so if you are looking for a guaranteed premium you will want a GUL policy.
Whole Life vs Indexed Universal Life
Variable Universal Life Insurance (VUL)
Variable Universal Life insurance or VUL is the most risky life insurance product offered. The cash value or a VUL policy is tied to sub accounts which are similar to mutual funds. Variable Universal Life policies get the full return of the market, but also lose when the market is down.
With the risk of losing when the market is down, variable life policies that are underfunded or over quoted can lead to disaster. It’s important to have good understanding of these types of policies before purchasing one.
Whole Life vs Variable Universal Life
The Disadvantages of Universal Life
While there are many advantages to universal life insurance if structured properly but there are some disadvantages.
- If cash value doesn’t perform, premiums could increase (unless you buy a guaranteed universal life)
- Cost of Insurance rises each year
- Low Returns
- High Fees
So their you have it, the answer to whole life vs universal life insurance question. Depending on your situation, what the coverage is for, and how much you can afford will determine which type of life insurance is best.
Make sure to work with an independent agent, LIKE US, that has access to multiple companies. This will ensure you get the best policy that is offered. If you have any questions, please don’t hesitate to give us a call.
Frequently Asked Questions
Whole Life vs Universal Life: Which is cheaper?
If you purchase a guaranteed universal life policy it will be significantly cheaper than a whole life policy.
Does universal life have a guaranteed cash value like whole life?
No, universal life insurance does not have a guaranteed cash value like whole life insuranc does. Universal Life does build up cash value, it’s just not guaranteed.
Does universal life have a guaranteed premium like whole life?
Yes, if you purchase a guaranteed universal life (GUL) policy then the premium is guaranteed to age 121.