Subject: Brett Simpson, chairman of Rogers Financial Group and a trustee for the Institute for Advanced Financial Education Whole life is generally the safest route for those looking for something predictable and reliable, while IUL policies provide an interesting retirement-planning vehicle with greater upside potential and tax advantages. Since you can borrow against it—or surrender your policy to get the cash value—it offers some financial flexibility in the case of an emergency. Buying any permanent life insurance is one of the biggest financial decisions you will ever make. It’s more flexible and offers permanent coverage at a middle-of-the-road price. In addition to universal and whole life, you can also explore other forms of life insurance such as term, group life insurance, and more. Unlike term insurance, which guarantees a death benefit payout during a specified period, permanent policies provide lifetime coverage. You can learn more about the standards we follow in producing accurate, unbiased content in our. Whole Life vs. Universal Life Insurance Whole life insurance covers you for the rest of your life, but universal life insurance offers much more flexibility. To answer your question in simple terms, yes, a universal life policy is the same as whole life. I have received a copy of a letter written by someone within the industry, whom I’ll call “Mr. It’s also important to consider the use of derivatives by indexed universal life insurers. Universal life insurance, also known as “adjustable life insurance,” offers more flexibility than whole life insurance. We offer a variety of life insurance solutions, including Term, Whole, and Universal Life Insurance. Whole Life vs. Universal Life: Both Are Permanent Insurance Term life insurance only lasts for a specific “term” or period of time. (Note: This article was written by an executive at a top life insurance company that sells both Whole Life Insurance and Universal Life Insurance, and has no vested interestin either. Policyholders can also borrow against the cash value of the policy. Some IULs also come with guaranteed contractual benefits through riders, which can actually provide guaranteed benefits that are comparable to general account products. Still, IUL policyholders should not rely on high equity index returns to fund their life insurance over time. As such, people are going for the affordable option that provides guaranteed lifelong coverage. The use of stock options also eliminates dividends from any index return calculation, which usually accounts for 2% to 4% of the total market return. You can borrow against the cash value of a whole or universal policy. The interest rate is set by the insurer and can change according to the market. The death benefit may be reduced or forfeited if premium payments lag behind performance. Universal life insurance assumes an interest rate and the cost of insurance and comes up with a projected premium. As their name implies, their earnings potential is tied to an equity index. "Life Insurance Basics." Whole Life vs. Universal Life Insurance: An Overview, Pros and Cons of Universal Life Insurance, How Being Nonbinary Affects Getting Life Insurance, Qualifying for Life Insurance When You're Transgender, Accidental Death and Dismemberment Insurance (AD&D), Life Insurance vs. IRA for Retirement Saving, Life Insurance Policy Loan: Tax Implications. Accessed April 26, 2020. A portion of your premium funds the policy just like it would in a health, auto, or homeowners insurance policy. As such, it's especially important to research any firms being considered to ensure they're among the best whole insurance companies currently operating. But it’s also complex and could be risky, so it’s not right for everyone. Although there are limitations, you can reduce or increase your death benefit and pay your premiums at any time for in any amount after you have made your first premium payment. Both whole and universal life insurance give you coverage for life, with a cash value that can be borrowed against. If you cancel your permanent life policy, you will receive the policy's cash value (minus any fees).. What is Universal Life Insurance? Many insurance companies provide minimum cap rates of between 1% and 4% and participation rates of around 50%, although some provide non-guaranteed cap rates of around 10% to 14% and participation rates in excess of 100% in sales materials, according to a The Bishop Company LLC report. Universal life insurance is a more modern version of whole life insurance. Indexed universal life insurance policies are relatively new. What is whole life insurance? Deciding Between the Two . Universal life (UL) insurance is permanent life insurance with an investment savings component. Regardless of which type of policy you decide on, be sure to compare the companies you're considering as well to ensure you're getting the best whole life insurance or the best universal life insurance possible. Unlike term life insurance, universal life premiums can rise over time. Another negative feature: the fees. With this extended period, premiums are considerably more expensive. For example, a 20-year term policy will expire after 20 years. Similarities of Whole Life and Universal Life. The two most popular types of permanent life insurance are: Whole Life; Indexed Universal Life (IUL) Whole life leads the two with 35% of life insurance sales and IUL trails at 24%. This month’s features an insurance debate between whole life or universal life. Allow you to borrow against the cash value for tax free life insurance loans. ; Whole Life Insurance. Investopedia uses cookies to provide you with a great user experience. Before making a final decision, you should review your current situation as it relates to you, your family, and your finances. Make sure to discuss the status of your cash-value fund with your insurance adviser or agent before stopping the premiums. 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. However, you must not make repeated withdrawals as this may reduce the cash value amount and leave you little in the time of need. The premiums are flexible, but not necessarily as low as term life insurance. Universal Life. Your insurance company puts part of your premium payments into a high-interest bank account or investment account. The simple answer is that in most cases, a traditional whole life insurance policy is a better choice than a variable universal life insurance contract. Whole life insurance policies have been around for decades. To borrow against the policy, you must meet a minimum cash value requirement, as you can't borrow against the policy's face value. Investopedia uses cookies to provide you with a great user experience. When it comes to the latter, two popular options are whole life insurance and index universal life insurance (IUL). Since a call option is inherently capped at a certain level or expires worthless, IUL policies have limitations to the maximum returns during good years and limit the downside to 0% returns during bad years. Universal Life Insurance provides pretty much the same benefits as whole life insurance but is more flexible. Whole life policies guarantee benefits with fixed premiums and known minimum growth. While similar in some respects, whole life and universal life insurance policies have some key differences. Indexed universal life (IUL) policies have flexible payments with cash accumulation pegged to the performance of an equity index. High returns in some years can lead to policyholders neglecting to fund the cash value of the policy, which could lead to a lapse in coverage later in life if returns aren’t quite as good. Insurance Information Institute. Here are four reasons why Equity Indexed Universal Life (EIUL) policies aren’t recommended when you want predictable, guaranteed growth and/or if you intend to use the policy for becoming your own financing source, as is the case with Bank On Yourself.. We also reference original research from other reputable publishers where appropriate. ; Universal life insurance offers flexibility by allowing you to make premium payments at any time and in any amount. X,” from a number of different sources, each asking for my comment. Accessed April 26, 2020. Allstate. For example, Term 20means that an insurance policy provides coverage for 20 years. USA.gov. Permanent policies accrue cash value that can be used for disbursements such as retirement income or emergency savings. Whole and universal life insurance differ from term insurance in that they last for your whole life. If the index falls, returns can be inferior, although there are often floors to prevent extreme losses. Whole and universal life insurance are both permanent policies that have death benefits and build cash value as investments over time. On the other hand, if it performs poorly, the estimated returns are not earned. Another perk is the ability to partially withdraw or borrow funds from the cash value. Universal Life Insurance a newer, more flexible version of Whole Life. In the most simple term: Whole Life insurance provides level premiums and that wonderful option of pulling some money out when you need it the most. Whole Life and Universal Life have a large number of similarities. This account credits interest based on the performance of an underlying index with a floor of 0% return and a cap rate and/or participation cap on the return. This growth is generally tax deferred and can be accessed over the life … Individuals deciding between these options should carefully examine their needs before committing to a life-long decision. Accessed April 25, 2020. Whole life insurance offers steady premiums and opportunity for cash value accrual through the investment component. Universal life insurance also lasts a lifetime, but it has the capacity to adjust the benefit later on. Whole and Universal life insurance fall into the same category—Permanent life policies. Permanent life insurance provides death benefit coverage for the life of the insured. In a universal life insurance policy, you can raise or lower those payments as you see fit, within the limits of the policy. Insurance Information Institute. What Is Universal Life Insurance? An accumulation option is a policy feature of permanent life insurance that reinvests dividends back into the policy, where it can earn interest. Difference Between Universal Life & Whole Life Insurance. Insurance Information Institute. For this reason, permanent life insurance is also known as cash-value insurance. As long as you keep paying the premiums, your beneficiaries will receive the death benefit when you die. This policy is highly suitable for long-term responsibilities such as a dependent adult child's care or post-death expenses like estate taxes. Whole life and universal life insurance are both types of permanent life insurance. Whole life insurance gives a policyholder lifetime coverage and a guaranteed amount to pass on to beneficiaries, so long as the contract is up to date at the time of the policyholder’s death. Variable universal life (VUL) insurance is a permanent life insurance policy with a savings component in which cash value can be invested. Whole life insurance is designed to be exactly that—life insurance. Whole life insurance offers consistent premiums and guaranteed cash value accumulation, while a … For GUL to offer lifetime coverage, you need to select a maximum coverage length. Universal life can change when life events need you to do so. Whole life and universal life are the two main types of permanent life insurance. Without these returns, policyholders may generate a lower return than the benchmark indexes. The difference is that universal life is one type of whole life policy, with the definition of whole life insurance simply being a policy which does not expire. In contrast, indexed universal life insurance policies are more like retirement-income vehicles. The let… These types of life insurance policies are both typically comprised of two parts: a savings or investment portion and an insurance portion. An accelerative endowment is an option in a whole life insurance policy to withdraw the dividends that have accumulated in the account. Instead, the policy functions on assumptions made about policy performance. The right life insurance for you will depend on your family structure and financial situation as well as your appetite for risk and desire for flexibility. He has requested to remain anonymous.) One attractive feature of whole life policies is the guaranteed cash value. The Difference between Whole Life Insurance and Universal Life Insurance . Individuals shopping for permanent life insurance, which offers a cash component as well as insurance coverage, have a number of different options. Variable universal life (VUL) insurance is a permanent life insurance policy with a savings component in which cash value can be invested. "Universal Life Insurance Definition." Universal life insurance is typically one of the more expensive types of whole life coverage, owing in large part to the way the accrued cash value can be … Universal life (UL) insurance is permanent life insurance with an investment savings component. If the policy performs well, there are chances of potential growth in your savings fund. What are the different types of permanent life insurance policies? Another key … This savings element of your policy builds up your cash value on a tax-deferred basis. Whole life insurance is made to fulfill an individual's long-term goals and it is important to keep it going for as long as you live. However, universal life insurance gives you additional control over your investment mix, and has opportunities for tax-sheltered income (in Canada). Rather than purchasing equities outright, the insurance company typically enters into options contracts using some portion of the policy premium, which enables them to pass on the upside gains without the downside losses—but at the cost of additional counterparty risk. The money you pay-in every month to purchase your life insurance coverage is called your premium. In contrast, indexed universal life insurance policies are more like retirement-income vehicles. Accessed April 25, 2020. Twenty-five to thirty years ago, the life insurance industry would have been ahead to heed this advice, and the same is true today. By using Investopedia, you accept our, Investopedia requires writers to use primary sources to support their work. By using Investopedia, you accept our. For that reason, universal life insurance is less expensive than whole life insurance. The interest you earn grows on a tax-deferred basis, increasing your cash value., You can adjust the death benefit when needed, increasing it (often subject to a medical exam) if your circumstances change, or lowering it to reduce premiums. Alternatively, you can use your cash value to pay premiums as long as there is enough money in that account., The ability to adjust the face value of your coverage without surrendering your policy is an attractive feature of universal life coverage. Accessed April 25, 2020. Whole Life Insurance Vs Variable Universal. The dynamics begin to get a bit murkier when looking at how the index exposure is built. Taking policy loans from the cash value and paying interest can also be a risky endeavor if the credited interest doesn’t cover the costs of the loan. Plus, during retirement, policyholders can take tax-free distributions from the accrued cash value to help cover any sort of expenses—useful for those who have already maxed out their Roth IRA and other options. Provide cash value growth. Universal life insurance is a type of permanent life insurance with a cash value that grows based on the current interest rate set by the insurer. Universal life insurance has a ton of advantages over term and whole life. "Personal Insurance." Universal Life Insurance A universal life policy protects you as long as you pay the premium. It is advisable to buy whole life insurance when you are younger to be able to afford it in the long term. Even the death benefits are not guaranteed in a UL contract. In the insurance industry, an annual dividend is a yearly payment given by an insurance company to a policyholder. But they have a few key differences in terms of flexibility and how your money is invested. These policies have two main parts—and investment portion and an insurance portion. Cash inside of these policies grows on a tax-deferred basis and can be used to pay premiums. In a whole life policy, this premium is a fixed payment of a set dollar amount. The main downside of universal life insurance is the interest rate, which is often dependent on market conditions. Surrender charges may be levied at the time of terminating your policy or withdrawing money from the account. "What are the principal types of life insurance?" This may run … The flexibility that a universal life policy provides is a key differentiator over whole life. Whole life insurance is designed to be exactly that—life insurance. Your policy may lapse if you cease to pay premiums and have insufficient cash value to cover the cost of insurance. You can earn interest on the cash value. Whole life insurance is called that because it covers you for your whole life, or as long as you continue to make premium payments. How to Decide Whole Life Insurance vs. Universal Life Insurance "What Is Universal Life Insurance?" Here’s the difference in a nutshell: Whole life guarantees the death benefit for life, guarantees the cash value and guarantees the premium – period. Based on Policygenius quotes, a 30-year-old may pay on average about $42 per month in premiums as an initial rate, but the rate will almost certainly fluctuate. In general, these policies are considered the safest option for those looking to provide for their family after death. Whole life insurance, on the other hand, provides coverage for the remainder of your life. Offer tax deferred cash value growth. The rest of your premium is invested by your insurance company and those investment gains build up your cash … Accessed April 26, 2020. The premiums are flexible, but not necessarily as low as term life insurance. Your insurance company to a policyholder month to purchase your life, universal life insurance policies flexible. 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