Understanding the Difference between Universal and Whole Life Insurance

Posted on: Tuesday, November 12, 2013

You probably don’t need to be told that life insurance is intended to offer you and your family a lifetime of security. Whole life and universal life policies fall under the category of permanent life insurance, as distinguished from term life insurance. Both types of policies are largely intended to provide your loved ones with financial security in the event of your death.

Term life insurance covers you for a specified length of time. Permanent life insurance, unlike term life, never expires. Most permanent policies provide savings and investment clauses combined with the basic insurance coverage. While premiums will therefore be higher than those of term insurance, the savings portion of the policy lets policy holders accrue cash value which can be borrowed against in times of emergency.

What, then, is the difference between whole life and universal life, which are the two types of permanent life insurance policies?

Whole Life Benefits

With a whole life insurance policy, all details are established at the time the insurance contract is written, and are not subject to change. The policyholder agrees to pay (usually monthly) premiums in exchange for a guarantee of a specified benefit which is to be paid out to a predetermined beneficiary at time of death. Earnings on a whole life insurance policy are set by the life insurance company based on the return on its investments, and can be borrowed against in time of need, or allowed to build for retirement.

Universal Life Insurance

Universal life insurance policies allow the policyholder to determine their own premium and death benefit. The result is a permanent policy with lower premiums and greater flexibility. Policyholders are not required to pay premiums each month, but must make minimum annual payments in order to maintain the coverage they desire.

Whole Life Insurance vs. Universal Life Insurance

Universal life policies seem very attractive, due to the flexibility they provide, but there are inherent risks due to long-term interest rates. If rates fall significantly, paid premiums may not cover the cost of keeping the universal life insurance policy in force. In that case, the insurance company can make up the difference by reducing the cash value. If it fails to take in sufficient funds, the policy could eventually collapse in on itself, and become worthless. You and your agent must keep an eye on any universal life policy’s progress, especially during recessionary periods. Whole life insurance policies are, by contrast, risk-free.

Once you have figured out your life insurance needs, it is then time to decide if a whole life insurance or universal life insurance policy is best for you. It is always important to make sure that the coverage you’ve chosen is your best investment.

Got questions? Core Benefits Group has answers. Please call us at 1-877-214-2969. 

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