Both universal and whole life insurance falls into the category of permanent life insurance. Permanent life insurance guarantees that there will be a death benefit payout during a particular time frame. They also provide a lifetime coverage deal.
These life insurance policies are usually made up of savings and investments, it makes premiums high, and you can also borrow against the cash value too.
They are both great options for life insurance however, they have their differences. Whole life insurance is consistent, it has fixed premiums and a guaranteed cash value. Universal insurance is more flexible in the payments and other elements.
Stick around for whole life insurance and universal life insurance explained, what the differences are, and how you can decide which one is best for you.
What is whole life insurance?
Whole life insurance is a form of permanent life insurance that will cover you for the rest of your life, no matter how long you’re around for.
Provided that you continue to pay your premiums, the beneficiaries of your death will get a death benefit when you pass on. It is ideal for long-term things such as if there is a dependent adult child care needs, or estate taxes and so on that will need covering.
How does whole life insurance work?
How does it work? Well, one of the best features of this is how it combines your coverage and savings. They will put part of the payments you make into a bank that accumulates a high-interest rate, or perhaps an investment account.
Then, each time you pay a premium, the value of your cash goes up. This element of savings in your policy builds up the value of the cash. It is an ideal option that is there to fulfill your long-term goals.
This is why it is also important that you keep your policy going for as long as you are around.
This type of permanent insurance is also great because of the cash value guaranteed, you can borrow against it or even surrender the whole policy in order to get the cash value. Which gives you a certain amount of flexibility financially if you end up in an emergency.
They also offer dividends that will be flexible too. You could receive them in cash per year, you could let them build up interest, or you could simply use them to lessen the premiums on your policy, or even buy more coverage.
Yet, the premiums and fixed benefits can make it an expensive option, especially if you are choosing between whole life and a term insurance policy. It is best to buy whole life insurance in your younger years for a long term plan that is reasonable.
What is universal life insurance?
Alternatively, universal life insurance is very flexible. You can reduce or increase the death benefit, and you can also pay the premiums whenever you want and with however much you want to, within limits, once there is money present.
While whole life is flexible, universal life is much more flexible.
How does universal life insurance work?
How does it work? Well, once you make a payment into your insurance plan, some of it will be invested in an investment brokerage account and interest that is gained will go to your account. This interest also gains on a basis which is tax-deterred, which raises its value.
You will also be able to alter the death benefit when you need to. You can increase it which may be subjective to a medical examination if things change, or you could lower it to decrease your premium payments.
You could also use the cash value to pay your premiums if you have enough in your account too.
The fact that you can adjust the value at the face of your coverage without having to surrender the whole policy totally is one of the main reasons why so many people like universal life insurance more than their whole life.
Financial circumstances are always subject to change and as this happens in your life you can rise, decrease and even totally halt your premium payments as you need to, so you are always happy with where you are financially and don’t put yourself out of pocket.
Of course, these plans are also loved because you can actually partially take out, or even borrow the funds available in your cash value. Although It’s not totally lenient, you can’t make repetitive withdrawals. Doing so could drastically reduce the valued amount and leave you with very little or even nothing when you actually need it.
Is there anything bad about universal life insurance? The main downfall is the interest rates on it, of course, these will fluctuate depending on the market conditions. If your policy goes well you may also get growth in your savings, however, if it is doing badly then the returns you would’ve expected won’t be earned.
The fees are also a downside too, some surrender charges can be levied when you terminate the policy, or when you withdraw funds from this account.
This is why, before you stop your premiums you should talk about the status of your funds in cash value with your adviser. You may end up having your policy lapse should you not pay premiums and also be lacking what’s needed to cover the cost of your insurance policy.