Whole Life vs. Universal Life - Different Options

Shopping for insurance you will come across two terms that will often come up; whole life insurance and universal life insurance. While both types of policy offer insurance protection for the duration of your life (so long as premiums are paid continuously), there are differences in how the premiums are paid, how the death benefit is calculated, and how the cash value accumulates.

Whole Life Insurance

In a whole life insurance policy, which is the traditional form of life insurance, the premium payment schedule and death benefit are determined at the time of inception - that's when the policy is written - and they don't change during the life of the policy. Sometimes the interest rate for the cash value accumulation is also part of the written contract at the start of the policy as well.

This practice is what gives whole life policies their strength. The terms are locked, the payment period is consistent, and the benefit is guaranteed. Unfortunately, this strength can become a liability if you suffer a financial tragedy, and you may have to choose between surrendering your cash value to continue making payments, or canceling the policy entirely.

Universal Life Insurance

Universal life insurance was designed to be flexible where whole life policies cannot be, though this also makes them a riskier choice. With these policies, neither the premiums nor the death benefits are guaranteed. Instead, the premiums you pay directly affect what your death benefit will be. While these policies allow you to pay premiums that are as much (or as little) as you wish, as often as you want, you also have to watch very carefully to make sure you meet the annual minimum payment or your death benefit will be reduced. On the other hand, if you are able to make larger-than-suggested payments, and can prove you are in good health, many universal life insurance policies life assurance quote will allow the amount of your death benefit to increase in proportion.

Another feature of universal life insurance is that they come with a special fund that helps you build cash value. You can earmark funds over and above the required premium to go directly to this fund. You will generally get a guaranteed minimum interest rate, but actual performance of the fund is tied to the insurer's investments, which means an added risk to you. For this reason, the required premiums for a universal life insurance policy are often lower than those for a whole life insurance policy with comparable coverage.

Universal life insurance offers one more feature that whole life insurance does not: the ability to determine how your premiums and death benefit will be calculated. You can choose to have your death benefit remain at a fixed point, or "level benefit," which would allow your increasing cash value to offset your premium payments, or you can have the benefit increase along with your cash value, in which case your payments would remain fairly stable.

In terms of protection, both whole life and universal life give you the same thing. The choice you have to make is one of caution vs. flexibility. Choose universal life insurance for more options and more risk, and stick with whole life insurance if you prefer guarantees. Before you purchase any plan make sure you do an insurance quote comparison on several insurance providers.