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Whole Life Insurance vs. Universal Life Insurance

Life insurance in any form is an invaluable asset to have, and one should carefully assess their needs before purchasing a policy that best fits their needs. Among the different types of life insurance options available today, whole life insurance and universal life insurance are alike in the most basic sense. However, the latter often comes with more flexibility in terms of premium payments and death benefits.

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Let’s quickly discuss whole life insurance and universal life insurance to build upon their unique features, similarities, and pros and cons. 

What Is Whole Life Insurance?

Whole life insurance is a category under permanent life insurance. It offers financial protection against your life till the time you live. This typically means that even if premiums are payable for a fixed tenure, the assured death benefit remains valid throughout your existence.

A whole life insurance policy ensures that your loved ones are secured at any point after your death. Such insurance policies are especially important if you have several dependents to look after and some high-value capital needs. 

Key Features of Whole Life Insurance

  • Death and maturity benefits on the death of the life assured and on the maturity of the policy, respectively.

  • Fixed premium payments throughout the premium paying term.

  • Accumulates cash value that acts as a savings avenue.

  • A portion of the premium goes to a high-interest account. 

  • No matter when the policyholder dies, their dependents shall remain covered.

Advantages and Disadvantages of Whole Life Insurance

Advantages of Whole Life Insurance
  • The policyholder can rest assured that the dependents will be covered financially after her/his death at any point in the future.
  • Whole life insurance offers level premiums, so you don’t have to worry about the premiums increasing at any point during the policy term.
  • The portion of premiums that goes into a high-interest account accumulates sufficient cash value in the long-term to serve different capital needs. 
  • Loans and dividends that one can avail of against the accumulated cash value make whole life insurance a popular choice among the masses. 
Disadvantages of Whole Life Insurance
  • The above-mentioned advantages make this plan more expensive than a standard term insurance plan. 
  • The benefits are significantly more favorable for a young buyer, as the cash value takes time to accumulate.
  • Growth of guaranteed cash value is found to be lower than market-linked investment vehicles. 

What Is Universal Life Insurance?

Universal life insurance is also a type of permanent life insurance that offers dual advantages of savings and protection. Such types of policies offer permanent coverage throughout your lifetime and help you build your savings through the built-in savings account. Universal life insurance policies come with minimum guaranteed cash value growth wherein one part of the premium amount goes into the savings account and the other part towards your insurance cover. 

This type of permanent life insurance is different from whole life insurance covers in terms of the flexibility it offers in how much premiums to pay and options to increase/decrease your death benefit amount.

Key Features of Universal Life Insurance

  • Life cover throughout the lifetime of the policyholder

  • The adjustable death benefit amount

  • Option to decide the premium amount 

  • A part of the premium goes into the savings account

  • Option to encash cash value once it reaches a specified limit

  • Cash value may vary depending on market performance

Advantages and Disadvantages of Universal Life Insurance

Advantages of Universal Life Insurance
  • It offers savings opportunities along with life insurance cover for the whole life of the life assured. 
  • Policyholders have the option to increase or lower coverage amounts keeping in sync with their needs and the rate of inflation. 
  • With flexible premium payments, you can now decide how much additional premium you would like to pay above the premium amount fixed for life insurance. 
  • The cash value against the additional premium grows at a guaranteed rate of interest; so there is always potential to earn and save more.  
  • You have the option to take loans and/or make withdrawals against the accumulated cash value. 
Disadvantages of Universal Life Insurance
  • The standard deductions in terms of fees are more than that of whole life insurance.  
  • Premiums are expensive as compared to term life insurance.
  • Policyholders may need to undergo a medical evaluation before increasing the death benefit amount.
  • Growth in the cash value may be subject to market risks if the premiums are invested in a unit-linked fund.  

Whole Life vs. Universal Life Insurance - Differences

Broadly speaking, both whole life and universal life insurance are types of permanent life insurance with a built-in investment/savings component. Therefore, a comparison between the two will give us several similar features, however, it is important to know that each carries very different connotations.

The following section highlights the basic differences between whole life insurance and universal life insurance to help you make the best decision.

Distinguishing Features Whole Life Insurance Universal Life Insurance
Premium Amount Fixed throughout the policy  Variable except for the fixed component attached to the life cover 
Coverage Benefit Death benefit once decided upon can’t be changed The death benefit can be higher or lower than the original sum assured 
Rate of Interest The rate of interest associated with the cash value is fixed at the time of policy issuance and accrues annually The rate of interest is subject to changes based on market performance
Cash Value Accumulation Guaranteed, however, may be lower than universal life insurance. Significantly higher returns, however, are subject to market-linked risks.

Disclaimer: Policybazaar does not endorse, rate, or recommend any particular insurer or insurance product offered by an insurer.

The Bottom Line!

A lot of new insurance buyers confuse between the two plans and end up picking one that may not be suitable in the long run. However, we have described each type of policy in detail and highlighted the differences between the two. The final decision to invest in life insurance, whether whole life insurance or universal life insurance is completely yours. However, you must do so after careful consideration. Do not forget to factor in the number of dependents, their potential future needs, your long-term goals, affordability, among other aspects.

Whichever option you choose, know that each offers excellent opportunities to increase savings while also ensuring the financial stability of your family.

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