Understanding Whole Life and Guaranteed Universal Life
When searching for a life insurance policy, the choice typically comes down to either a permanent insurance policy or a term insurance policy. The difference between the two is straightforward. Permanent insurance, like guaranteed universal life and whole life, is insurance you intend to keep for the rest of your life. Term insurance is meant to insure you for a certain number of years, like 10 years, 20 years, or 30 years, no longer than that.
If you’ve decided on a permanent policy because you always want to have insurance in force to provide financial protection for your survivors, retirement funding, paying for college tuition, or any cash accumulation needs, you will primarily see two types of life insurance to choose from. Here, we will compare whole life vs universal life.
Though they both are members of the permanent life family, there are significant distinctions between them that make a big difference in the financial impact they can have on a family. Fortunately, those differences are easy to see, and that is why we’re going to be taking a close look. That begs the question, “Whole life vs universal life: which is best for you?”
Let’s look at what whole life insurance is, what guaranteed universal life insurance is, and the differences between them.
Whole Life Insurance
Much as the name implies, whole life insurance is meant to be kept your “whole life,” you can keep it that long, providing you pay your scheduled premiums. It’s guaranteed not to lapse as long as you pay. This permanence gives many people a measure of security, knowing that their life insurance policy will always be part of their financial plan and protect their family’s income when it’s needed down the road.
Whole life premiums are calculated at the age the policy is issued, and the rates are fixed at that point. Most people prefer to pay their premiums monthly for as long as they have the policy; however, they can also pay annually or for a fixed period, so the policy is “paid-up” in 10 years, 20 years, or at age 65.
Purchasing a whole life could be considered a conservative approach when deciding which type of policy you want. You’ll always know what your premium will be, what the cash value building inside the policy will look like, and what the death benefit will be when paid to your survivors. When economic times and interest rates are uncertain, the reliability that whole life offers can be very reassuring.
As with guaranteed universal life, the cash value inside the policy builds on a tax-deferred basis. A significant benefit of whole life is taking policy loans from the cash value at a low interest rate without adverse tax consequences. Also, remember that policy loans outstanding when you die will be deducted from the death benefit paid to your survivors. Using policy loans to pay premiums can also help get you through times when funds are low.
Guaranteed Universal Life Insurance
You may have heard of guaranteed universal life insurance, referred to as “adjustable life insurance” or “UL.” It is flexible and adjustable, and if you want the option of having your premiums, the face amount of insurance, and cash value fluctuate, then you may be comfortable with a universal life policy.
Sometimes, our income can vary from year to year, even month to month. Young people raising families and self-employed individuals are two categories of people who can experience some pretty extreme variances in cash flow from time to time.
Universal life allows you to change the amount and frequency of your premium payments using the accumulated cash value built inside the policy. You can withdraw funds or take a policy loan against the cash value to make premium payments as your situation dictates. This can eliminate having to come up with the premium during a given month(s). However, it will affect your cash value accumulation down the road because of the opportunity cost of losing the growth of that money.
In addition to the flexibility of premium payments with universal life, the face amount of the policy can also be adjusted. It can be increased, subject to evidence of insurability, or decreased to the minimum face amount required. You may want a higher face amount when you have a growing family, a lower face amount when the kids are out of college, and a higher face amount later in life to pay for potential estate taxes. A UL policy provides you with this flexibility.
Whereas whole life pays out regular dividends and interest accumulating within the policy as money that can be accessed over time, universal life also has a cash accumulation feature. Universal life’s accumulation is interest-rate driven, meaning that during periods of high interest rate crediting, the policy’s cash value can rapidly accumulate. However, in a low-interest-rate environment, cash value accumulation can be painfully slow, even to the point where it can adversely affect the amount of the premiums you’ll need to pay to keep the policy in force.
Which Policy is Right for You?
The best policy for a close friend or relative of yours doesn’t mean it’s the best policy for you. You may have school-age kids, and they don’t. They may have a comprehensive retirement plan at work, and you don’t. You may be a bit more on the conservative side financially than they are. You have to look at your situation and decide on the best type of policy based on what you see.
- Which companies have the best guaranteed UL?
- Which companies offer the best whole life insurance?
Flexibility is a significant advantage of universal life policies. The ability to make changes to premium and face amounts is vital to some people. Guaranteed insurability riders make it feasible to add to the policy’s face value, even if you become uninsurable due to an unforeseen illness. Adding incrementally to your face amount can be valuable if you have a growing family and your need for more insurance gradually increases.
Reliability is a major advantage of whole life policies. Fixed premiums and dividends are features that many people prefer. They prefer to experience their volatility with their 401(k) plan at work or when investing in the stock market. But when it comes to life insurance, they want the peace of mind of knowing that their life insurance will be one financial constant in a world of fluctuating markets and interest rates.
The cost of insurance is typically higher with whole life vs universal life. This lower cost makes universal life look more appealing at first glance, but then again, if you’re looking for security, you might be willing to pay more to have it.
It’s often said that the best type of life insurance is the kind you have in place when you die. While there’s some truth to that, we also spend a good portion of our adult lives paying premiums for our life insurance. This is why you want to make the best decision on the type of policy that will serve you and your family best over the years and at the end of your life.
Use our convenient life insurance rate calculator to see your premiums for a policy that will serve you for a lifetime. With over 25 years of experience helping people select the best type of life insurance for their situation, we look forward to assisting you with this very important decision.
Frequently Asked Questions
Why should I buy whole life or guaranteed universal life insurance?
If you’ve decided on a permanent policy because you always want to have insurance in force to provide financial protection for your survivors, retirement funding, paying for college tuition, or any cash accumulation needs, you’re primarily going to see two types of life insurance to choose from: whole life and universal life.
Should I buy Guaranteed Universal Life Insurance?
You may have heard of guaranteed universal life insurance referred to as “adjustable life insurance” or “UL.” It is flexible and adjustable, and if you want the option of having your premiums, the face amount of insurance and cash value fluctuate, then you may be comfortable with a universal life policy.
What is the difference between Whole Life and Guaranteed Universal Life Insurance?
If you are looking for reliability, then whole life might be for you. If flexibility is more appealing then look at Guaranteed Universal Life Insurance. Discussing your personal needs with an independent life insurance agent can help you decide which way to go!