If you are looking for a permanent life insurance policy, you have two options: whole life and universal life insurance. Show
Both of the permanent life insurance policies offer lifelong coverage and the potential to build cash value over time. But that is where the similarities end. Whole life insurance offers a lot of guarantees (a consistent premium rate and death benefit and predictable cash value growth) while the main attraction of a universal life insurance policy is its flexibility. So, which permanent life insurance policy is better — whole life or universal life insurance? Continue reading to find out the answer.
Keys Takeaways
Whole Life InsuranceWhole life insurance is a type of permanent life insurance. The coverage does not come with an expiry date; instead, it lasts for as long as you pay the premiums. Lifelong coverage, however, is not the only difference between term and whole life insurance. Whole life policies also include a savings component, called cash value, which grows over time on a tax-deferred basis. Which means no taxes are paid until you withdraw the cash value. As a result, your money grows at a faster rate than it would in a bank saving account. The life insurer divides your whole life premiums into three portions:
The insurer invests the money in the cash-value account into a conservative-yield form of investment. Since whole life policies promise a guaranteed minimum return, you are protected against severer market fluctuations. But when the insurer’s investments perform well, you earn a better return. Generally, the cash value grows at a slow pace in the first few years and then picks up the pace later. As you grow older, the cash value growth rate slows down again as a greater chunk of your premium payments is used to cover the cost of insurance. Your life insurance policy’s face amount (that is, the death benefit) is for your loved ones while the cash value is available to you while you are still alive. If you do not use all of it, the insurer claims the remaining cash value. When you die, your loved ones receive only the death benefit, not the unused cash value. So, how can you tap into your policy’s cash value? You can access it in many ways, such as:
However, lifelong coverage and a built-in investment account — the two main features of whole life insurance — come at a price. If you want a whole life policy, expect to pay six to 10 times more than a comparable term life plan. All the same, whole life insurance can be a good option for some people, despite the high cost. The better choice between whole life and universal life insurance is specific to each person. That is why speaking with a professional can help. Looking for expert advice? Speak with licensed insurance advisor BOOK MY CALL Who should consider Whole Life Insurance?You may want to consider it if you:
Pros and cons of Whole Life InsuranceJust like any other financial product, whole life insurance comes with its own set of advantages and disadvantages.
Universal Life InsuranceUniversal life insurance is also a type of permanent life insurance. This means you get lifelong protection, provided you pay the premiums. Most universal life insurance policies also build cash value, but they generally offer more flexibility than whole life insurance. For example, you can adjust premium payments, within limits. Some universal life policies also let you select the investment options for your cash value. You can withdraw from or borrow against your policy’s cash value any time you want. Additionally, you can also use the cash value to purchase more protection or pay future premiums. Universal life insurance mainly comes in three types:Guaranteed Universal Life (GUL) InsuranceGuaranteed universal life insurance policies mean a guaranteed level premium and death benefit. Which means they both will remain the same throughout. You pick an age when the coverage ends, such as age 90, 100, 110, etc. The higher this number, the greater the cost of insurance will be. These policies do not build much cash value, if they build any at all. The upside is that guaranteed universal life insurance is cheaper than other types of universal life plans. However, remember, if you miss one payment, your policy could lapse. Since there is no or little cash value, the insurer cannot use it to cover a premium payment. Indexed Universal Life (IUL) InsuranceThese universal life insurance policies provide lifelong protection and offer the freedom to increase or decrease premium payments and the death benefit, within certain limits. The built-in investment component is usually linked to a stock market index. An IUL policy comes with a minimum and maximum guaranteed rate of interest. So, even if the stock market tanks, you are not likely to lose all of your cash value. On the downside, you will have limited gains when the financial market is in a strong uptrend. IUL policies are more complex and expensive than guaranteed universal life insurance. Variable Universal Life (VUL) InsuranceA VUL policy also lets you adjust your premiums if your needs or financial situation changes. However, these policies require a closer monitoring than other types of universal life plans. That is because you pick the sub-accounts that impact your cash value growth. If you invest wisely, you can get good returns. Conversely, if your investment choices do not play out as expected, the cash value might get completely wiped out. Who should consider Universal Life Insurance?Universal life insurance policies could make sense if:
Pros and cons of Universal Life InsuranceLet’s look at the advantages and disadvantages of universal life insurance.
Differences between Whole Life and Universal LifeWhole life insurance offers a variety of guarantees but little control over how your cash value is invested. With whole life insurance, you get three kinds of guarantees:
However, you do not have any say in how the cash value is invested. The insurer decides that. Universal life policies can offer more choices and flexibility. For instance, indexed universal and variable universal plans let you adjust the size of the death benefit if your insurance needs change in the future. You can also adjust your premium payments if you want. Plus, variable universal policies allow policyholders to select investment options that work best for them. On the other hand, those who care more for lifelong coverage than the investment component of the cash value account may find guaranteed universal a better option.
Which Policy Would be Better for You?Finding the right whole or universal life insurance policy comes down to your family’s needs and financial needs. If you are someone who does not like any guesswork after purchasing life insurance, whole life insurance may be right up your alley. Your premiums will not increase, the death benefit remains the same throughout, and the cash value earns a guaranteed minimum interest rate. But if flexibility is important, universal life insurance may be a better choice. You can adjust the death benefit and premium payments up and down, within defined limits, if needed. Universal life insurance policies may give better returns on cash value than whole life, but it is not guaranteed. ConclusionBoth whole life and universal life insurance offer unique benefits. But the choice between the two entirely depends on your life insurance policy needs and long-term goals. If you want permanent life insurance but are not sure which one is better for your situation, speak to a life insurance expert at Dundas Life. And if you have already made the decision, we can help you get the right coverage at the lowest price. What is the difference between whole life term life and universal life insurance?With whole life insurance, neither your premiums nor your death benefit ever changes. The cash value within a whole life insurance policy builds at a fixed rate. On the other hand, universal life insurance allows you to adjust both your premiums and the death benefit to fit your needs better.
What happens to cash value in universal life policy at death?This cash value provides a living benefit you can access while you're alive. When you pass away, your beneficiary typically receives only the death benefit. Universal life insurance policies have an option for beneficiaries to receive both the cash value and death benefit.
What happens when a universal life insurance policy matures?Universal life insurance policies have a maturity date which occurs when you turn a certain age (often between 85 to 121). When a policy reaches its maturity date, you generally receive payment and coverage ends.
Why would someone take out a term life insurance policy rather than a whole or universal life policy?Term life insurance is cheap when compared to whole life. It covers you for a set period of time and pays out if you die during the term. Whole life insurance typically lasts your entire life and has a savings component known as the “cash value,” which makes it a more complex and expensive product.
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