Universal Life Insurance vs. Whole Life Insurance: What Are the Advantages?

Both permanent life insurance policies can provide protection for your entire lifetime. The primary difference is usually in the flexibility of premiums.

Although whole life insurance protects you for your entire lifetime, just as universal life insurance does, the premium costs for whole life insurance are defined when the policy is issued, and are generally not changeable after that.  Additionally, there are limitations to whole life premium payment flexibility. 

Universal life, however, allows flexibility in adjusting your payments as long as required minimum premiums are met. Generally, universal life insurance policies include a cash value component and a flexible payment structure: you can either increase or decrease how much you pay toward your premiums. (Note that if you choose to decrease, the difference will be withdrawn from the accrued cash value of your policy and, should there not be sufficient cash value, the policy could lapse.)

1. Universal life insurance is a permanent life insurance option that can be a good choice for people who need flexibility, are looking to help build a nest egg, and who want a death benefit that is typically tax-free for their beneficiaries.
   
2. One of the great things about universal life insurance is that part of the premium you pay goes toward the death benefit and other costs of coverage, including policy fees, while the rest is applied toward the cash value of your policy. As time goes on, the cash value can continue to grow. 
   

There are several advantages to choosing universal life insurance as a potential permanent life insurance solution: 

• Ability to adjust your death benefit amount as your financial needs and circumstances change.
• You can adjust your contribution to your Cash Value component
• You can withdraw cash from your account, provided enough cash value remains in place to keep the policy in good standing.

On the other hand, whole life could also be a good option for several reasons, including:

• The policy is set at purchase – your premiums won’t increase, and the death benefit won’t decrease.
• Whole life may also build cash value, although it may be at a slower pace than some other permanent options

Permanent insurance, whether you choose UL or whole life, can be a viable life insurance option for many types of individuals. However, UL is attractive for those who prefer flexibility over stability, want to control how much they pay for premiums, and desire the ability to accumulate cash value at a potentially higher rate.

Let’s break down the differences of universal life insurance as compared to whole life insurance.

Insurance Policy Flexibility

Universal life insurance may provide more flexibility than whole life insurance, but it doesn’t have a death benefit that is guaranteed (your death benefit could be reduced in certain cases, such as if you took a loan or withdrawal from the policy). That said, it’s a good option if you’d like an insurance policy that you can adjust as your life changes. You can make changes to your premium payments based on fluctuating income, new additions to the family, major life shifts, or other reasons. Whole life is more structured, with less ability for adjustments.

Long-Term Life Protection

The flexibility of universal life insurance allows you to configure your policy as needed. You can design it to last for as little as a few years, a lifetime, or somewhere in between. This allows you to dictate your coverage and premiums, giving you more long-term protection options. Whole life typically has fixed coverage and premiums.

Cash Value

While both whole life and universal life have the potential to accumulate cash value, universal life insurance can sometimes grow more quickly, especially when it’s tied, in part, to a  market index (this is known as an index universal life policy). Though this may also run the risk of losing value, most insurance companies provide a guaranteed minimum to help protect against major losses in your cash value. And it’s important to note clients cannot invest directly in an index. 

While index universal life policies could offer the potential for higher interest crediting, in times where the underlying index underperforms, there may be no interest credited. It's worth noting that these insurance policies are not subject to loss as a result of market returns. Cash value could be decreased due to fees and expenses, but will never be reduced for negative index performance.

Cost-Effectiveness

Whole life insurance generally provides more stability as a policy, but this can also entail a higher premium because of the guarantees associated with whole life. Universal life insurance is often the more affordable option, especially when you consider how you’re able to adjust your premiums as needed.

Life Insurance Withdrawals

While only some whole life insurance policies may allow you to make withdrawals or take out loans, it’s a standard option for most universal life insurance policies. This means that you can get cash when you need it, provided you have accumulated enough cash value to draw upon and as long as minimum cash value remains to keep your policy in force. Accessing cash value will reduce your policy death benefit and values, may result in certain fees and charges, and may require additional premium payments to maintain coverage. Ask your financial professional for additional information about accessing your cash value, including the potential impact on coverage guarantees and certain circumstances under which the values you access could be taxable.

The choice between universal life insurance and whole life insurance ultimately depends on your needs. It’s important to consult a trusted financial advisor or a licensed life insurance agent to determine which policy may work with your current and future circumstances. 

People who desire flexibility may benefit from universal life insurance because it provides the option to tweak premiums as life takes its twists and turns. You can increase your premiums when you have more disposable income, or decrease them during uncertain financial times (as long as minimum premium payments are met).

Universal life insurance also makes sense for individuals who are comfortable with higher risk in exchange for a larger potential cash value accumulation. That said, most companies offer lower-risk cash value growth options for those with a lower risk tolerance.

• What is Universal Life Insurance in Simple Words?
• What is Index Universal Life Insurance: IUL Insurance?