So you’ve decided that term (temporary) insurance isn’t right for you, and you’d like to purchase permanent life insurance. Universal Life Insurance and Whole Life Insurance are the two most popular options to consider. Let’s take a look at the difference between the two.
Whole Life Insurance
Whole life insurance offers predictable premiums and the possibility of taking money out when you need it most.
This Whole life insurance is also known as traditional life or permanent life insurance, is the oldest form of life insurance available.
The cash value account is one of the most common features of whole life insurance. The policyholder pays more than the real cost of the death benefit with each periodic premium, resulting in a cash-value account. A part of the premium charge is used to pay for life insurance while the remainder is transferred to the cash value account, allowing the policyholder to build equity.
Essentially, the insurance firm invests the money on your behalf and then returns a percentage of the profits to your checking account.
You have multiple options for accessing your cash value as a policyholder:
- Use the money to pay the insurance premiums.
- Withdraw the gains on a taxable basis; the sum you withdraw would be deducted from your death benefit.
- Take out a policy loan; there is no credit check, but you will be paid interest. The death benefit would be reduced by the number of unpaid loans and interest.
- Convert your cash account into an interest annuity.
- You will use the cash value of the contract to purchase long-term care policies.
- Withdraw funds as much as you want – your death benefit would be limited by the sum you withdraw.
Universal Life Insurance
Universal life insurance is similar to whole life insurance in terms of benefits, but it is more versatile. When life events need it, universal life will change.
Death Benefits That Can Be Modified
The death advantage of term and whole life insurance is usually set in stone. On the other hand, a UL policy allows the policyholder to raise or decrease the death benefit, obviating the need for a separate policy.
As your financial needs evolve over time, you’ll likely find that your UL policy’s premium flexibility is a great choice.
Increase the Death Benefit
If you have a significant cash value in your account that you do not wish to withdraw, you will normally exchange all or part of it for an extra death benefit.
Loans for Public Policy
A policy loan allows you to access your cash value quickly. You will be charged a small fee for the loan, but you will not be expected to repay it. The death benefit is reduced by the amount of unpaid loans and interest.
If your account has accumulated a significant amount of cash value, you can simply stop paying premiums and get them removed from your cash account.
Withdrawals of Policies
You have the option of withdrawing your cash value rather than taking out a loan. You do not repay it, and no interest is paid. Your death benefit would be reduced by the amount of the withdrawal, depending on the withdrawal amount.
After comparing Universal Life and Whole Life Insurance, the key distinction that stands out is the universal life policy’s versatility. Even though we didn’t discuss it, Universal Life can be much less expensive than whole life because you can choose how much you want to put into the policy.
But be careful in underfunding your coverage could cause it to lapse, leaving you without coverage. The good news is that your insurance provider will send you an annual statement that includes a fixed coverage period, giving you advance notice if your policy is about to run out of money.