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Whole life vs. Universal life insurance

Jun 21, 2021 4 Minute Read

Thinking about life insurance? For most people, term life is the most affordable and simple option to protect what matters. Term life lasts for a set period of time and provides a guaranteed payout during the term.

In some cases, though, you might need protection that lasts beyond a specific term length. That’s where permanent life insurance can help.

Permanent life insurance provides lifelong protection, so you don’t need to choose a coverage length or worry about renewal. With a permanent policy, your beneficiaries receive a guaranteed death benefit as long as you pay your premiums. It also builds cash value you can borrow from as needed during your policy. Permanent life is more expensive than term life and requires a medical exam, but it can be the best choice if you want a guaranteed way to leave a legacy.

If you’re considering permanent life insurance, there are two main types: whole and universal. Wondering how whole life vs. universal life compare? For example, do they both offer cash value? Is one more expensive? Here’s a look at how whole life insurance vs. universal life insurance stack up, so you can make the right choice.

What is whole life insurance?

Whole life insurance is the most common type of permanent life insurance plan. One major feature of whole life is its dependability.

With whole life, you make a fixed payment, called a premium, that won’t go up or down over time. Your savings component will continue to increase at a steady rate, and you can borrow from it if needed. Keep in mind that borrowing or withdrawing funds from any permanent life insurance policy without repayment will reduce your cash value and death benefit. As long as you keep up with payments, you receive a guaranteed death benefit.

There are a few key benefits of whole life insurance:

  • It’s simple to budget for whole life insurance since your premiums won’t change.
  • Whole life offers financial peace of mind through a guaranteed death benefit that won’t fluctuate.
  • You can borrow against your cash value or withdraw from it for any reason, or cash out the entire policy if you wish.

What is universal life insurance?

Universal life insurance is a type of permanent life insurance that offers more flexibility than the typical life insurance policy.

With universal life insurance, you will pay monthly premiums that are divided between your death benefit and a cash value account. Your insurance company will charge you a minimum premium to keep the policy active. If you pay more than the minimum, it helps your cash value account grow faster. You have the option to adjust your premiums over time, as long as you make the minimum payment.

Unlike whole life insurance, which grows at a fixed rate, your cash value grows based on current interest rates. When you buy a universal life policy, your insurance company establishes a minimum interest rate. Your interest rates may go up and down based on the current market rate, but it will never go below the minimum rate.

Some of the key benefits of universal life include:

    • You have the flexibility to change your premiums and death benefit if your financial situation changes.
    • Your cash value can grow faster than whole life insurance if interest rates are high, although the reverse is true if they go lower.
    • Any interest you earn from your cash value account is typically not taxed until you begin withdrawing from the account, meaning your funds can grow faster over time.
  • You can skip premium payments if you have enough cash value in your policy to cover them.

Choosing between whole vs. universal life insurance coverage

There are a few factors to consider when choosing between whole life or universal life insurance:

  • How much flexibility do I have in my budget? Whole life premiums stay the same, while universal life premiums can change.
  • How predictable are my needs? Whole life insurance offers dependable protection if you don’t expect your finances to change over time, while universal life insurance offers flexibility if they do.
  • Cost and earning potential. Universal life insurance premiums tend to be less expensive than whole life to offset the risk, since you can end up earning less if the interest rates go lower. With universal life insurance, there is a chance that you will earn more, but there is also a chance that you will earn less. Whole life insurance, on the other hand, is a sure bet.

Before purchasing any kind of permanent policy, make sure that you fully understand it and that it’s the right fit for your needs. Term life insurance provides long-term protection at a fraction of the cost of permanent insurance. eFinancial offers a variety of term life insurance and permanent life insurance plans and can help you make the right choice.

Want more information about the difference between universal and whole life insurance?

We’re here to help. eFinancial works with top-rated life insurance companies to help you find the right coverage for you and your family. Call us or start your quote online today.