Understanding the Two Kinds of Permanent Life Insurance
The two most common types of permanent life insurance policies are Whole Life and Universal Life. Understanding the difference between the two can be difficult. Since both types of policies provide a financial benefit to be paid to your beneficiaries when you die, how then do you pick the right one for you? Do they both increase in value over time? Is one cheaper than the other? What are their main differences? Let’s see if we can make it a little clearer.
Whole vs. Universal Life Insurance
Whole life and universal life insurance are both permanent life insurance policies. That means they’re designed to last your entire life and won’t expire after a certain time period, as opposed to term life insurance (that is, as long as the required premiums are paid). They both have the potential to accumulate cash value over time that you may be able to borrow against tax-free, for any reason. Because of this feature, premiums may be higher than term insurance.
What is Whole Life Insurance?
Whole life insurance policies have a fixed premium, meaning you pay the same amount each and every year for your coverage. Much like universal life insurance, whole life has the can accumulate cash value over time, creating an amount that you could borrow against if need be.
A whole life insurance policy can be described as providing life insurance protection with an accumulation feature, and might be a good choice if you want a policy with:
- Premiums that stay the same amount for the life of the policy
- Cash value accumulation that you could use while you’re still living
- Protection that you can’t outlive as long as your premium payments are made in a timely manner.
What Is Universal Life Insurance?
Universal life insurance policies have flexible premiums that allows you to adjust how much you’ll pay each year, by accessing some of the policy’s cash value (you’ll still need to pay the minimum premium amount or the policy will lapse). Depending on your policy’s potential cash value, it could be used to skip a premium payment, or be left alone with the potential to grow in value over time.
Potential growth in a universal life policy may vary based on the details of your individual policy, as well as other factors. When you buy a policy, the issuing insurance company establishes a minimum interest crediting rate as outlined in your contract. However, if the insurer’s portfolio earns more than the minimum interest rate, the company may credit the excess interest to your policy. This is why universal life policies have the potential to earn more than a whole life policy some years, while in others they can earn less.
A universal life insurance policy might be a good choice if you want:
- The flexibility to adjust your premiums and coverage amounts (although if you increase your coverage, additional underwriting may be required.)
- Cash value that you may be able to borrow from while you’re still living
- Permanent* life insurance protection and access to cash values
What are the Differences Between Whole Life and Universal Life Insurance
Whole Life Insurance Benefits
Whole life policies give you a fixed premium that won’t increase, the potential to accumulate cash value over time, and a fixed death benefit for the life of the policy. In addition:
- Any cash value growth is tax-deferred
- Whole life can allow you to make withdrawals and loans against the policy
- Whole life offers the ease of budgeting for a regular and consistent premium payment every month
Universal Life Insurance Benefits
Universal life can provide you with a variety of different payment options, including the flexibility of changing your death benefits, as well as the potential to accumulate cash value over time. Here’s how:
- Since there is a cash value component, you may be able to skip premium payments as long as the cash value is enough to cover your required expenses for that month
- Some policies may allow you to increase or decrease the death benefit to match your particular circumstances (but again, if you increase your benefit, additional underwriting may be required.)
- Depending on your policy, you may borrow against the cash value that may have accumulated in the policy
- The interest that you may have earned over time accumulates tax-deferred (as it does with whole life)
Understanding the Main Differences in Permanent Life Insurance
The flexibility that a universal life policy gives you is a key differentiator over whole life. As a result, universal life insurance premiums are typically lower during periods of high interest rates than whole life insurance premiums, often for the same amount of coverage.
Another key difference is how the interest is paid. While the interest paid on universal life insurance is often adjusted monthly, interest on a whole life insurance policy is normally adjusted once a year. This could mean that during periods of rising interest rates, the cash values of universal life insurance policies may increase at a much faster rate compared to whole life insurance policies.
Some people may prefer the set death benefit, level premiums, and the potential for growth of a whole life policy. However, for those who would prefer to have more flexibility and options when it comes to their permanent life insurance, then universal life might be the better choice.
Finding the Right Permanent Life Insurance Policy for You
Although whole and universal life policies have their own unique features and benefits, they both focus on providing your loved ones with the money they’ll need when you die. By working with one of our qualified life insurance agents, you’ll be able to select the policy that best meets your individual needs, budget, and financial goals. Come talk to us today!
