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Universal vs Whole Life Insurance: Key Differences

Mar 7, 2023 | Insurance, Life Insurance

When shopping for permanent life insurance, it’s crucial to look at the differences between universal vs. whole life insurance. These options provide you with a lifelong investment and a backup plan for your family in the event of your untimely death. 

The differences between universal and whole life insurance are significant, so proper research is essential. No matter which type of life insurance you choose, both offer unique benefits. Speaking with an insurance agent to compare policies can help you select the right option.

Understanding Whole Life Insurance vs Universal Life Insurance

While both universal vs. whole life insurance offer permanent security as long as you pay the monthly premiums, there are key differences to consider, such as individual policy types, coverage length, premium characteristics, and more. Understanding how each works will help you make the right choice for future protection.

Both whole and universal life insurance won’t expire after getting coverage. You’ll also enjoy investment benefits, as they gain a cash value as you pay monthly premiums. Both types will lapse if you cannot maintain premium payments; you may have alternative options depending on the specific policy.

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Whole Life Insurance

Whole life insurance is permanent life insurance that extends throughout the entire duration that you make payments. Your monthly premium covers the cost of insurance, administrative fees, and your investment account if you take the policy out in cash. Coverage ends when you stop paying into the policy.

You’ll add to your plan’s cash value as you pay into whole life insurance. The tax-deferred investment allows you to grow your account faster, as you won’t pay taxes until withdrawing the final amount.

Your investment grows significantly with positive market activity from your insurer. However, investment rates for a whole life insurance policy fluctuate throughout the years. You’ll get higher rates during specific periods of your life when insurance premiums increase due to age.

Whole life plans cost considerably more than temporary-term options. Depending on your health, age, and insurance priorities, you’ll pay higher rates for coverage.

Universal Life Insurance

Universal life insurance provides permanent coverage and works similarly to a whole life policy. You’ll get a lifelong insurance policy while you pay premiums, as well as a cash value account. Its significantly more flexible cash investment makes it possible to get lower premium rates. 

Flexibility among universal life insurance is the primary difference between universal and whole life insurance. You can get lower premiums, withdraw your accumulated cash value to pay premium expenses, or increase your policy amount.

When considering universal vs. whole life insurance, it’s essential to note the differences in universal policy options. Multiple universal life insurance types are available:

  •  Guaranteed universal life insurance: This universal option is significantly more affordable than other options. You’ll pay the same premium rates throughout your life and get coverage until an age of your choosing. However, this option’s cash value earning potential is significantly lower than other types.
  • Variable universal life insurance: Individuals with variable universal life insurance enjoy flexibility, as this option allows you to adjust premiums with your lifestyle and health changes. You manage your cash value account by making multiple investments. Depending on your investment selections, you may significantly maximize your investment account. 
  • Indexed universal life insurance: Indexed universal life insurance offers limited adjustable coverage. Policyholders get flexibility with policy payouts and potentially lower premium costs. You’ll also enjoy a guaranteed minimum interest rate that protects your cash investment account from stock market crashes.

Key Differences Between Universal and Whole Life Insurance

While they are similar, there are significant differences between universal vs. whole life insurance. Key differences lie in premium flexibility, your investment account options, and tax advantages.

Cash Value Account Accumulation

Whole life insurance policies include cash value accounts, bringing consistent growth. You can use your life insurance policy as a loan if you can no longer pay for coverage.

Universal life insurance also offers a cash value investment account, but you must manage the account yourself, and investments may not grow at the same steady rates as a whole life insurance plan.

Premium Flexibility

You’ll get significantly more flexible premiums with a universal life insurance policy. Whole life insurance offers a flat rate throughout the entire coverage duration. Universal life insurance policies are adjustable depending on your financial needs, making getting the coverage you can afford easier.

Tax Benefits

You can avoid paying taxes on whole life insurance investments by avoiding meeting the maximum tax accrual amount. With a universal plan, you may also have a tax requirement after meeting the maximum investment limit. How much you withdraw from your investment account will determine the final amount of your death benefits.

Benefits and Disadvantages of Universal vs Whole Life Insurance

When deciding between universal vs. whole life insurance, understanding their pros and cons can help you determine which fits your needs best. Whether you want significant investment flexibility, stable premiums, or another priority, finding a plan that meets your budget and coverage requirements is possible.

Whole Life Insurance Pros and Cons

Key features of whole life insurance include a way to manage your wealth, a consistent premium, and little to no investment experience requirements.

Whole life insurance brings benefits like the following: 

  • Permanent coverage until you stop paying or pass away 
  • Guaranteed minimum interest rates for your cash investment account 
  • Confirmed benefits in the event of your untimely death 
  • Ability to withdraw your cash investment at any time

Disadvantages of whole life insurance include:

  • Higher costs than term and universal life insurance plans
  • Increased administrative costs 
  • Significantly lower investment interest rate

Pros and Cons of Universal Life Insurance 

When comparing universal vs. whole life insurance, universal options have significantly more investment flexibility, allowing you to stay within budget year-round. Individuals with relevant experience may lower or increase their investment.

The pros of universal life insurance include:

  • A growing cash value account
  • Self-management regarding investments
  • Several different subtypes of coverage
  • A permanent policy for you and your family

Cons of universal life insurance include:

  • High administrative charges 
  • Higher costs than term life insurance
  • Increased investment risk

Suitable Applicants for Whole Life Insurance

Individuals who should get whole life insurance include:

  • Those with children or disabled loved ones in their household: Whether the policyholder passes away soon after getting coverage or years into the plan, beneficiaries receive the payout. The policy must still be active. 
  • Those that want a backup plan for their family: If you wish to provide your family with extra financial support after your death, a whole life insurance policy is an excellent choice due to having few limitations.
  • Individuals looking for investment alternatives: Whole life insurance policies offer a decent return on investment. Individuals wanting to increase their investments can enjoy better returns with this option.

Individuals Who Should Get Universal Life Insurance

When choosing between universal vs. whole life insurance, individuals who should consider universal life insurance include:

  • Individuals wanting lifelong coverage: Universal plans are often better for people concerned with gaining lifelong coverage. Applicants wanting permanent protection who are not as concerned with building cash value may prefer this choice.  
  • Those seeking investment alternatives: Due to the many investment subtypes, universal life insurance plans are a top consideration for experienced investors.
  • Individuals requiring premium flexibility: Canadians on a budget or those whose coverage needs may eventually change should pick universal life insurance, as it allows you to get lower rates throughout your life.
  • Individuals requiring premium flexibility: Canadians on a budget or those whose coverage needs may eventually change should pick universal life insurance, as it allows you to get lower rates throughout your life.

Determining the Best Policy Option

When determining whether universal vs. whole life insurance is best for you, you must consider your financial limitations, future financial needs, and family’s concerns. The insurance cost varies depending on whether you have pre-existing conditions, are aging, and more.

Whole life insurance offers more stability and consistency regarding costs and investment growth. Policyholders face no surprises regarding benefits or premium rates and get guaranteed interest rates. 

Universal life insurance offers significantly more flexibility with restrictions and can offer higher investment returns. It’s possible to lose your entire cash investment with the wrong sub-accounts.

Related Article

Now, let’s take a look at how whole life insurance compares to term life insurance

Alliance Income: Compare Life Insurance Policies

You can further determine whether universal vs. whole life insurance is best for you by discussing your options with an insurance expert from Alliance Income. The Alliance Income team helps you find worthwhile insurance policies, including universal and whole life insurance. 

Alliance Income compares the top rates and details policy information to help you find the perfect match. Fill out our online quote form today and get started on the path towards investing in life insurance.


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