Whole Life Vs. Universal Life Insurance

Whole life and universal life insurance are both considered forms of permanent life insurance. Universal life insurance rates are lower than whole life because some of the risk is transferred to the insured person. Whole life insurance cannot lapse or be canceled except for non-payment of premium, but universal life can lapse if the cash value invested in the account reaches zero due to investment failures. The equity (cash value) in whole life is guaranteed by the insurer, but the equity in universal life is not.

Whole Life vs. Universal Life Cash Value

The cash value of both whole life and universal life insurance are taken from part of the premium payments. Whole life insurance is placed in secure investments and guarantees a rate of return on the money. The cash value of universal life is invested in financial markets and there is no guarantee that the money will earn returns and it can suffer losses. If the cash value of a universal policy reaches zero due to investment failures, the policy lapses and the insured person must seek new life insurance coverage.

Death Benefits

The death benefit of whole life insurance is guaranteed at the face amount of the policy as long as the policy remains in force. The death benefit of universal life insurance is tied to the success of investment in the cash value of the policy. While the policy will never pay more than the face value amount, if the investments do not do as well as expected, the insured person’s beneficiaries may receive a payment that is less than the face value amount of the policy.

Premiums of Whole and Universal Life Insurance

Whole life insurance premiums are fixed for the entire time the policy is in effect, but term life offers flexible premiums with a minimum and maximum payment. The more the policyholder pays in premiums, the more money is diverted to the investment account. Minimum payments may be increased if the cost of administering the policy increases. Policyholders cannot pay premiums from the cash value account of a whole life policy, but they can pay premiums from the cash value of a universal life policy.

Investment Potential of Whole and Universal Life Insurance

Whole life insurance offers a secure investment with a guaranteed return which can be used in financial planning. Universal life insurance offers investment potential in financial markets which may provide greater returns than those of the guaranteed rates of whole life, but also has a potential for loss that does not exist with whole life policies. The choice between whole life and universal life depends on the amount of risk a policyholder is willing to assume in his or her permanent life insurance investment.

As investments, both whole and universal life insurance have tax deferred returns and tax exempt death benefits. Both offer an excellent way to save for retirement or other long term financial goals. The biggest difference between the two types of life insurance is the amount of risk involved in the investment. Since universal life insurance is the riskier investment, it is priced lower than whole life insurance. The decision to purchase universal life insurance usually depends on the risk tolerance of the individual investor.

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