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Whole Life Versus Universal Life: Which One Is For You?

Jeff Rose, CFP®


The insurance market today has many options that are geared towards addressing numerous needs for individuals and families considering life insurance.


Whole life and universal life are two popular permanent life insurance products to choose from and it’s important that you understand the advantages and disadvantages of both types.


The products under these two umbrellas address a need for lifelong coverage as opposed to the temporary “term” coverage, which protects a policyholder for a certain number of years (typically between 10-30), upon which time it may continue as a very expensive annual renewable term policy.


Rather than face the high costs of annual renewable term, forgetting to move to a permanent policy during a term’s conversion period, or face much higher premiums at the expiration of a term policy, whole life and universal life allow clients to receive a policy with premiums based on their current ageand health factors, such as if you suffer from diabetes, or being heavily overweight.


WHOLE LIFE


Whole life insurance policies have a good reputation because of their connection with dividend-paying insurance carriers, so the cash value within the policy builds in a relatively low-risk fashion. These funds are then available for the policyholder to borrow against, but one of the downsides is the importance of following strict carrier rules about when and how much money can be borrowed- those who deviate may wind up owing taxes.


UNIVERSAL LIFE


Universal life offers the same “lifelong” protection as whole life, but policies come with flexible features that interest clients who want some customization. For example, the face amount of the policy can typically be increased or decreased over the life of the policy. Rather than just the traditional level death benefit offered by whole life, policyholders can also elect an increasing death benefit, which factors in the face value of the policy as well as the accumulated cash value.


Premium payment options for amount and frequency allow for further flexibility. If the policyholder becomes unable to pay the premium for a short period of time, the accumulated cash value can cover that premium amount. If that cash value becomes depleted, however, the policy may be in danger of lapsing.


The main difference between the two types of policies is that accumulation in a whole life policy is guaranteed, whereas the performance of a universal life policy can depend. Interest rates for a universal life policy are usually adjusted on a monthly basis as opposed to the annual readjustment of whole life.  For those who prefer a little bit more involvement in their policy, universal life offers flexibility as well as cash value accumulation. The protection offered by these policies can interest a broad range of potential policyholders.




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