Whole Life vs Universal Life Insurance

Both whole life and universal life are permanent insurance. Each has the ability to build cash value over time and each pays a death benefit according to the contract. But each also has unique advantages depending on an applicant’s own unique needs.

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What is Whole Life Insurance?

Whole life is designed to provide insurance coverage for the entire life of the insured. As long as premiums are paid per the contract, a whole life insurance policy remains in force until maturity. Part of the premium is applied to cover the cost of the life insurance. The other part is invested in order to increase tax-deferred growth.

Whole life insurance premiums are usually higher than those for universal life. But a whole life policy purchased early in life can be more cost effective than one purchased later. This is because it costs less to insure a younger person than it does to insure an older one. Insurance companies manage risk. From the company’s perspective, the probability of paying the death benefit is less likely with a younger person than it is with an older person.

The specifics of policies vary among insurance companies and states, but there are six common types of whole life policies:

Participating Whole Life

The premiums for a participating whole life policy are the most costly as this policy pays a dividend based on the earnings of the insurance company. The policyholder “participates” in the financial success of the company.

Non-Participating Whole Life

A non-participating whole life policy establishes a premium amount and a set face value that remains level during the entire policy. This policy does not pay a dividend and therefore the premiums are less expensive.

Level Premium Whole Life Policy

The premiums for a level premium policy remain the same as long as the policy is in effect. During the first few years, the premium covers the insurance company’s cost. The balance of the premiums along with the amount earned, make up the difference in providing insurance in later years, as the premium does not then cover the cost. The additional amount is invested by the insurance company and is what creates the cash amount of the policy. The reasoning behind this policy is that, all things being equal, it is less expensive to insure a younger person.

Limited Payment Whole Life Policy

A limited payment policy lets the policyholder pay premiums for a limited amount of time as established by the contract. The premiums are almost always more than a standard whole life policy as they are paid in less time. All underwriting criteria being the same, the final amount of premium paid on a regular whole life policy and paid on a limited payment policy is the same. The amounts are simply paid over a different amount of time. This is a great choice for policyholders who desire to have permanent coverage but who need to set a fixed number of premium payments.

Single Premium Whole Life Policy

Single premium whole life policies are bought with a lump-sum payment. This policy has immediate cash value that can be borrowed or used as collateral. Single premium policies are more investment focused than other whole life plans. They are more often than not used as estate planning tools.

Intermediate Premium Policy

An intermediate premium whole life policy offers adjustable premiums. The cost to manage whole life policies is called the “earning, mortality and expense” rates. The cost of managing the policy is reflected in the premium.

What are Universal Life Policies?

Universal policies have three separate and distinguishable parts: The premium paid by the policyholder, the death benefit paid to the beneficiary upon the death of the policyholder and the vested value of the policy that grows over time. The premiums paid by the insured are placed in the cash account of the policy and managed by the insurance company.

A universal life insurance policyholder can instruct the insurance company to invest the premiums as he or she sees fit. He or she can often choose among several different investment options in order to meet his or her unique objectives. However, the policyholder will incur a loss if the total value of the investments decreases. This is the danger of a universal life policy: It can drop in value and thereby reduce the amount of the death benefit.

Whole Life vs Universal Life Policy as Investments

Since permanent life insurance policies pay a death benefit and can gain or lose value, they are considered to be combination insurance and investment products. Insurance agents who sell these policies must be licensed by the state in which they sell the products. They must also be registered as securities dealers who can sell universal life policies.

The NASD (National Association of Securities Dealers) requires agents to have passed either the Series 6 or Series 7 Exam, depending on the specifics of the products they sell. As an investment product, universal policies are guaranteed by insurance companies to pay a guaranteed return. That return, however, might be smaller than the return of a more traditional whole life policy because the investments are more complicated.

Universal life insurance policies are like to whole life policies in that a portion of the premium for each goes toward covering the cost of providing the insurance. Any gains added to the cash account for both types of policies grow tax-deferred.

When looking at a permanent whole or universal life policy as either an insurance or investment product, applicants are always advised to make sure the company from which they are purchasing the policy is financially sound and credit-worthy. All life insurance policies represent a future financial liability.

If a policyholder buys the policy at age 55, the insurance company may not incur the liability for another 15 or 35 years. Choosing a company with exceptional ratings by A.M. Best, Moody’s Investors Services and Standard and Poor’s should provide peace of mind that the policy will be there when needed.

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