Whole vs. Universal Life Insurance: What’s the Difference?


Comparing the different types of insurance policies available to you can almost make you feel like you need to learn another language. Variable life, indexed life, guaranteed issue life, survivorship life insurance—and the list goes on. 

Jump ahead to these sections:

The three most common types of life insurance people settle on are term life insurance, whole life insurance, and universal life insurance. This article will focus on whole life and universal life insurance since they’re both from the same family: permanent life insurance.

While most financial advisors will recommend that you purchase term insurance, whole life or universal life can be the right product under the right circumstances. Let’s explore the differences between the two and provide some helpful information for when you make your next life insurance purchase. 

Overview: Whole vs. Universal Life Insurance

Whole life insurance and universal life insurance are considered permanent insurance because they’re meant to be kept for the policyholder’s entire life. In contrast, term life insurance expires after a specified period of time. 

Whole life and universal life are different, but they also have much in common. Let’s look first at the commonalities.

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Similarities between whole life and universal life insurance

Cash value. Both types of policies build “cash value” and provide death protection through the life insurance component of the policy. The cash value can be likened to a savings account in some respects. Money can be put in and taken out by the account/policy owner, and it grows over time because of interest being added to the account balance and compounding over time.

The cash value grows tax-deferred, meaning that no taxes must be paid as long as the money remains in the policy. Once money is received due to a partial or full surrender, the amount taxed depends on what was paid to the insurance company in premiums.

Lifelong coverage. As long as the premiums are paid every month, the policy will remain in force (active) for the insured person’s entire life and pay a death benefit when they die. 

Surrender periods. Whole life and universal life both have a period of time where you can pay a charge to surrender (withdraw) part or all of your cash value. As the cash value of the policy increases each policy year, the surrender charges will decrease. The surrender charges can last up to 20 years with some companies’ policies. 

Policy loans. Both policy types allow for policy loans. A loan is different than a withdrawal for a couple of reasons. The loaned amount is charged interest but is also credited interest equal to the charges, which is referred to as a “wash loan.” If there’s an outstanding loan balance when the insured individual dies, that outstanding balance will be deducted from the death benefit payable to the beneficiaries

Differences between whole life and universal life insurance 

Cash value crediting rate. With a whole life insurance policy, the interest rate that will be applied to the policy’s cash value is fixed when the policy is issued, so the policy owner knows what the cash value will be at the end of each policy year. 

That’s not the case with universal life. The amount of interest credited to the cash value varies with universal life, depending upon current market interest rates. And with variable universal life, it depends upon stock market gains and losses. If the cash value in the policy doesn’t grow sufficiently because of poor market performance, the policy owner may need to pay more than expected into the policy to keep it from lapsing.

Dividends. Some whole life insurance policies pay dividends; universal life insurance does not. There’s no guarantee a dividend will be paid with a “participating whole life insurance policy,” but if the insurance company performs better financially than expected in any given year, they may share some of those profits with policy owners in the form of a dividend. The policy owner can use that dividend to buy more life insurance, reduce their required premiums, or add to the cash value and earn interest.

Premiums. This is a critical difference between whole and universal life insurance. With whole life insurance, the monthly premium is a fixed amount that won’t change throughout the policy's life. Universal life allows the policy owner to elect to pay a premium amount of their choice that must be large enough to maintain a cash value amount sufficient to pay the policy’s expenses.

For example, Carl takes out a $100,000 whole life insurance policy with a $100 per month premium. Carl’s premium won’t increase for as long as he owns the policy.

Carl also took out a $100,000 universal life policy. He elected to pay the minimum premium of $80 per month, but he could have chosen to pay $120 per month if he wanted more money to go into the policy's cash value.

Whole vs. Universal Life Insurance: Costs 

There are two types of costs with a universal life insurance policy: the cost of insurance and policy charges (administrative fees and expenses, etc.). 

With universal life insurance, the cost of insurance changes yearly as the insured individual gets older because the death benefit, like term life insurance, increases with age.

The cost of insurance for a whole life policy never increases. It’s based on the age of the insured when the policy is issued, and it stays the same for the life of the policy.

As with any type of life insurance, the higher the death benefit under your whole or universal life insurance policy is, the higher your premiums will be. 

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Whole vs. Universal Life Insurance: Who Are They For?

Universal life insurance and whole life insurance cater to different types of insurance buyers. Though whole life insurance has been around a lot longer than universal life, their share of the permanent life insurance market is just about split down the middle. So who are they made for?

Whole life insurance 

Whole life insurance is made for someone who wants life insurance and cash value in one policy, and they want guarantees and stability. These buyers are not open to any type of market risk with their cash value. Instead, they want a guaranteed interest rate and the written assurance that their policy will only lapse because of the non-payment of premiums, not due to market or investment underperformance.

Still, some whole life policyholders get uncomfortable when they learn that one missed premium payment could result in their policy lapsing, regardless of the amount of cash value the policy has. To fight this fear, some companies provide a rider, known as the “automatic loan provision,” that will pull money from the cash value to pay the monthly premium if the policy owner doesn’t pay it on its due date.

Universal life insurance

Universal life insurance is perfect for those who value flexibility. As mentioned previously, the premium payment amount is flexible depending on the amount of cash value in the policy. 

Not enough cash value can mean the policy owner has to increase their premium, but ample cash value means the owner doesn’t even have to make a premium payment because it can be taken from the cash value. This is beneficial to people that have an occasional cash flow crunch and don’t have enough money in their budget some months to pay a life insurance premium.

The death benefit with universal life is also flexible. A policyholder can select death benefit Option A, which pays the beneficiary the face amount stated on the insurance policy. Option B pays the face amount stated on the policy and the amount of cash value at the time of death.

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Should You Get Whole Life Insurance, Universal Life Insurance, or Neither?

We’ve looked at who whole life insurance is made for, who universal life insurance is made for, but what if neither option is right for you?

If this is the case, you may prefer term life insurance. The term life buyer only wants life insurance, not cash value. They prefer to build a cash/savings/retirement account by another means, like a 401(k) or a Roth IRA.

Term is perfect for younger people who need life insurance protection but have a limited budget or someone who only needs life insurance for a certain amount of time, like 30 years to protect a mortgage.

Bottom Line 

When it comes down to paying a death benefit to your loved ones because you’re no longer there, any type of life insurance is good life insurance. What ultimately matters with life insurance is that someone you care for gets paid, and that payment makes their life easier in some way. It’s the perfect way to show someone how much you care.


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