Policy Types

The Difference between Whole Life and Universal Life Insurance

Both whole life and UL are permanent policies with a savings component; however there are differences between the two that are worth researching, such as flexible premium amounts.

Many people like the appeal of a permanent life insurance policy with its lifetime coverage and savings element. But once you've made a decision to purchase a permanent life insurance policy that can accumulate cash value, how do you know which one to choose - whole life or universal life? To make this important decision you need to understand how each policy works, then, compare the key differences between whole life and universal life insurance to select the policy that's right for you.

Whole life insurance

Whole life insurance covers you as long as you live. It has a fixed premium (meaning that you need to pay the same amount each year), a guaranteed death benefit, and provides steady, fixed growth on your cash value that builds tax-deferred until it is withdrawn. A whole life insurance policy can be described as providing life insurance protection with a savings feature, and might be a good choice if you want a policy with: .

  • Guaranteed level premiums that stay the same for the life of the policy
  • Guaranteed cash value accumulation that you can use while you're still alive
  • Protection for life

Universal life insurance

A universal life policy is designed to provide a lifetime of coverage with a tax-deferred, guaranteed minimum interest crediting rate that's specified in your policy. Unlike whole life, a universal life policy allows you the flexibility to reduce or increase (subject to additional underwriting) your death benefit as your needs change. It also allows you to change the amount and frequency of your premium payments or even pay in lump sum; although you must pay the minimum premium each year to avoid a policy lapse. If the cash value accumulation meets or exceeds the premium amount, you could even use the accumulations to help pay the required minimum premium each year to avoid a policy lapse..

The cash value in a universal life policy earns interest at a rate set by the issuing insurance company, and earns a minimum (guaranteed) interest rate as outlined in your policy. So if the insurer's portfolio earns more that the guaranteed interest rate, the company may credit the excess interest to your policy. This is why universal life policies may earn more than a whole life policy some years, while in others they can earn less. A universal life insurance policy might be a good choice if you want: .

  • The flexibility to adjust your premiums and coverage amounts
  • Cash value that allows you to borrow from while you're still alive
  • Permanent life insurance protection and access to tax-deferred cash values
  • The ability to set aside additional money (tax-deferred) to meet long-term financial goals

Understanding key differences

The flexibility that a universal life policy provides is a key differentiator over whole life. And the potential for higher interest rates with universal life could mean that your money doesn't have to work as hard to generate the same return. As a result, universal life insurance premiums are typically lower during periods of high interest rates than whole life insurance premiums, often for the same amount of coverage. And, while the interest paid on universal life insurance is often adjusted monthly, interest on a whole life insurance policy is adjusted annually. This could mean that during periods of rising interest rates, universal life insurance policy holders may see their cash values increase at a rapid rate compared to those in whole life insurance policies.

Although whole and universal life have their own unique features and benefits, they both focus on providing your loved ones with the money they'll need when you die. Be sure to work with a financial professional to learn which life insurance policy can best help meet your needs, budget, and financial goals.

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All Learning Center articles are general summaries that can be used when considering your financial future at various life stages. The information presented is for educational purposes and meant to supplement other information specific to your situation. It is not intended as investment advice and does not necessarily represent the opinion of Protective Life or its subsidiaries.

Neither Protective Life nor its representatives offer legal or tax advice. We encourage you to consult with your financial adviser and legal or tax adviser regarding your individual situations before making investment, social security, retirement planning, and tax‐related decisions. For information about Protective Life and its products and services, visit www.protective.com.

Differences between Whole Life and Universal Life Insurance

This article summarizes the differences between whole life and universal life insurance. Working with a financial adviser may the best way to understand both policies and how they may best meet your family's needs. For more information, visit our learning center.