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

Key Takeaway

Many people wonder about the difference and similarities between permanent life insurance policies such as whole life and universal life insurance. Are there advantages to one insurance policy over the other?

Whole life insurance vs. Universal Life Insurance scale image

Both permanent life insurance policies can provide protection for your entire lifetime. The primary difference between each insurance policy 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 policy 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 policy 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 (Note that if you choose to decrease, the difference will be withdrawn from the accrued cash value of your policy and, should there not be sufficient cash value, the universal life policy could lapse.)

  1. Universal life insurance is a permanent life insurance option that can be a good choice for people who need financial 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 financial fees, while the rest is applied toward the cash value of your policy. As time goes on, the cash value of your universal life policy can continue to grow.

Universal Life Insurance Versus Whole Life Insurance

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 life circumstances change.
  • You can adjust your contribution to your Cash Value component of the insurance policy
  • 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, a whole life insurance policy could also be a good option for several reasons, including:

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

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 out a loan or withdrawal from the insurance policy). That said, it’s a good option if you’d like an insurance policy that you can adjust as your life and financial needs change. 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 insurance policy adjustments.

Long-Term Life Protection

The flexibility of universal life insurance allows you to configure your policy as needed. You can design your insurance policy 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 Insurance Policy

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 financial 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 insurance policy rates, fees and expenses, but will never be reduced for negative index performance.

Insurance Cost-Effectiveness

Whole life insurance generally provides more stability as a policy, but this can also entail higher premiums 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 and rates as needed.

Life Insurance Withdrawals

While only some whole life insurance policies may allow you to make withdrawals or take out financial 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 insurance 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.

Universal Life Insurance Versus Whole Life Insurance: Which Policy Is the Better Option?

The choice between universal life insurance and whole life insurance ultimately depends on your financial needs. When choosing an insurance policy, 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 and rates when you have more disposable income, or decrease them during uncertain financial times (as long as minimum insurance policy 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 insurance policy companies offer lower-risk cash value growth options for those with a lower risk tolerance.

Please talk to a licensed insurance agent for more information about life insurance services and your needs.

EL01603y (3-24)

The information above is for educational use only and does not represent insurance, tax or legal advice. It is not a recommendation or solicitation to buy insurance. Please talk to your licensed insurance agent for more information about life insurance and your needs. Please consult with the appropriate professional for tax or legal advice. Guarantees are backed by the claims-paying ability of the issuing insurance company.

Article Author: Meredith Bell
Author Bio: Meredith joined Everly in 2022 and has 20+ years of experience in the life insurance industry. She has held various roles in advertising, marketing, communications, sales and distribution support, and product development. Outside of the office, Meredith lives with her daughter Kennedy and their dog Mavis. Meredith enjoys cooking, camping, gardening, hiking, and bourbon (though not always at the same time). She is a live music enthusiast and an avid reader. Her favorite quote is by Thomas Jefferson: "I cannot live without books." Meredith agrees, but would add cheese, movies, and dogs to that list.

Policies are issued by Everly Life Insurance Company (“Everly Life”), Topeka, KS. Everly Life is not licensed in the state of New York and does not solicit or transact business in New York.

A.M. Best's 15 ratings are a measure of claims-paying ability and range from A++ (Superior) to F (in Liquidation). Ratings are current as of January 25, 2024 and subject to change at any time. While ratings can be objective indicators of an insurance company's financial strength and can provide a relative measure to help select among insurance companies, they are not guarantees of the future financial strength and/or claims-paying ability of a company and do not apply to any underlying variable portfolios. The insurance agency from which a policy is purchased, and any affiliates of those entities, make no representations regarding the quality of the analysis conducted by the rating agencies. The rating agencies are not affiliated with the above-mentioned entities, nor are these entities involved in any rating agency's analysis of the insurance companies.

CalendarLive support: Mon–Fri, 8am–5pm CT

© 2023 Everly, LLC