Universal vs. whole life insurance: Comparing premiums, coverage & more

Universal life insurance and whole life insurance are two types of permanent life insurance. Both pay a death benefit to your heirs when you die, and both provide the opportunity to build savings you can use during your lifetime.

But when it comes to your death benefit and premium payments, universal life insurance offers more flexibility while whole life insurance offers more consistency. Comparing universal and whole life can help you discover the best option to provide financial security for your loved ones after your death.

Let's compare these contracts side-by-side. We'll cover the differences among key features and address common questions:

• Cash value
• How long coverage lasts
• Premiums
• Costs: Why is universal life cheaper than whole life?
• Death benefit
• Dividends
• Loans and withdrawals
• Surrender charges
• Universal vs. whole life comparison chart
• Is indexed universal life the same as universal life?
• Which is better - universal life or whole life?

Cash value can be an important component of permanent life insurance policies. As a living benefit, cash value can be used during your lifetime to fund emergencies, pay college tuition. You even can use it to supplement your retirement income. It’s available to you when and if you need it, simply by taking out a contract loan.¹

• Universal life offers a fixed interest rate tied to its cash value. Cash value typically earns a fixed rate of interest that changes over time with shifts in market conditions. Most contracts guarantee a minimum interest rate that your cash value will earn even if market rates drop.

• Whole life offers guaranteed cash value growth. With whole life insurance, you’ll always know what your cash value is worth at any time. Cash value growth is guaranteed and grows consistently for the duration of the contract. Whole life is designed so that your contract's cash value is guaranteed to equal the death benefit when the contract matures.

True to its name, permanent life insurance can last your entire life.

• Universal life has lifelong coverage if there is sufficient cash value. Your contract stays in force as long as it has cash value. Coverage is not guaranteed, so to stay covered throughout your lifetime, you may need to adjust your premiums because of interest rate fluctuations or increased insurance charges.

• Whole life has guaranteed lifetime coverage. Your contract stays in force and coverage is guaranteed unless you stop paying premiums and exhaust your cash value or choose to surrender your contract.

A premium is what you pay for life insurance coverage. With permanent life insurance contracts, part of your premium goes toward your death benefit. Another part goes toward building cash value in a savings account, which may grow on a tax-free basis.

• Universal life premiums are adjustable. You can adjust the amount and timing of premium payments to fit your needs. This flexibility allows you to build up cash value quickly or slow your contributions as your income and expenses change. However, stopping or reducing your contributions could deplete your cash surrender value and end your coverage.

• Whole life premiums are fixed. Your premiums are guaranteed not to change, and you can pay them over your lifetime. You also can pay your premiums over a shorter period so they're fully paid before you retire.

Whole life generally has higher premiums than universal life because whole life offers a guaranteed death benefit, predictable premiums and a cash value that’s guaranteed to grow. Essentially, contract holders pay more to take on less risk and enjoy more stability.

However, each product serves different needs. For some people, a less expensive and more flexible contract offers a better way to get the coverage they need, even if that means more risk and less predictability.

With either type of contract, your premiums will be based on many factors, including your age, location and health. Getting quotes is the best way to learn what you will pay.

The death benefit of life insurance is generally tax-free money paid out to beneficiaries when the holder of an in-force account dies.

• Universal life offers flexibility but less guarantees on the death benefit. You may be able to increase your contract's death benefit with additional underwriting or decrease it if your needs or financial circumstances change. Notably, universal life does not offer a guaranteed death benefit. If you stop or reduce premiums and deplete the cash value, your contract could lapse or end.

• Whole life guarantees the death benefit. Your death benefit is guaranteed and will never decrease as long as your premiums are paid. You may be able to increase your death benefit without additional underwriting if your contract pays dividends and you use them to purchase paid-up additions.

A dividend is money an insurance company distributes to eligible customers based on company performance. Not every insurer or contract offers dividends. And even with eligible contracts, dividends are never guaranteed (but some companies have a strong history of paying them every year).

• Universal life contracts typically do not earn dividends. Most universal life contracts are not eligible to receive dividends.

• Whole life contracts often earn dividends. Many whole life contracts are eligible to receive dividends. You can use dividends to pay premiums, increase your cash value, purchase additional insurance, reduce contract loan payments or get cash.

If you need to smooth out your income, cover increased expenses or get cash without a credit check, you may be able to access a portion of your cash value through a loan or withdrawal.¹ Universal life and whole life contracts both offer this living benefit, which is generally tax-free.

It's crucial to remember that loans and withdrawals may decrease your death benefit and the cash value available to pay insurance costs. They may cause your contract to lapse or terminate without value.

Another way to access the cash value your contract builds up is through surrendering, or cashing out, your contract. If you cancel your contract within the first several years, the cash value you receive may be reduced by surrender charges. Universal and whole life insurance contracts may have these charges.

No, indexed universal life is not the same as universal life. Both are types of permanent life insurance, but indexed universal life contains an investment-like component.

Instead of earning interest on your cash value like you would with a savings account, you can choose to earn a rate of return that's based on an investment index such as the S&P 500. This means your cash value may be more volatile with indexed universal life, but it also may have more growth potential, depending on how your chosen indexes perform.

The insurance company typically limits losses and caps gains on indexed universal life contracts, which reduces your risk but means you won't have the same success or failure as you would by investing directly in the index.

Neither type of life insurance is inherently better. Just like jeans and slacks, cookies and ice cream or sedans and pickups, each product is better suited to some people's situations and preferences than others.

Universal life may be a better choice if you:

• Want a generally more affordable permanent protection option.
• Want the option to vary the timing and amount of your premiums.
• Would like to be able to adjust the size of your death benefit.
• Are comfortable with the risk that coverage isn't guaranteed to last throughout your life if you aren't able to pay premiums or if you deplete your cash value.
• Can monitor your contract regularly to ensure it remains in good standing and has enough cash value to cover monthly insurance costs.
• Prefer cash value growth that reflects current market conditions.
• Don't mind not receiving dividends.

Whole life may be a better fit if you:

• Are comfortable purchasing coverage that likely costs more than universal life.
• Want the predictability of premium payments that will never change.
• Would like the size of your death benefit to remain constant.
• Seek coverage that is guaranteed to last throughout your life as long as you pay your premiums and avoid excessive contract loans or withdrawals.
• Want a contract you don't have to keep a close eye on.
• Are looking for cash value growth that isn't subject to market risk.
• Want the potential to receive dividends.

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