Both Whole Life and Universal Life are considered permanent life insurance options. While many people don’t feel the need for purchasing more than a simple Term Life insurance policy, you may find there are instances where a permanent life solution is more appropriate.
Understanding Universal Life Insurance
Universal Life insurance is similar to Term Life insurance in that you have a set death benefit. It goes beyond Term Life by adding an investment option, otherwise known as a cash component. Part of the premium amount you pay will go towards paying for your death benefit while the other part will go towards the cash value, which is similar to an investment account. The money placed in the cash value portion of your policy will earn tax-deferred interest and will grow over time.
The added benefit of the cash component is the buffer it gives you against emergencies. If, for example, you hit a rough patch and can’t afford your premium payment that amount could be taken to pay the premium from the cash you’ve accrued. Depending on the company you choose, you might even be able to borrow from your cash component. You may even be able to adjust your premium amounts.
There are variations on Universal Life insurance as well, including Variable Life. This type of policy allows you to choose where your cash investments go – for example, to a certain group of investments or to a mutual fund. One of the major drawbacks is that the interest you earn is likely to be lower than the standard rates you’d earn with other investment products. With a Variable policy, you also run the risk of a market change altering the value of your portfolio, which could result in you owing additional money to your insurance carrier.
Understanding Whole Life Insurance
Whole Life policies were designed to ensure you have life insurance coverage for the duration of your life, no matter how long that may be from the date of purchase. You choose the amount of time you’ll pay premiums, and that monthly premium will be set for the duration. There is a cash component to Whole Life, but most of your premium goes towards your death benefit.
The main difference between Universal and Whole is that Whole life insurance companies pay an annual dividend on your insurance and investments. You can use your dividends to increase your death benefit or to add to your investments. The larger your policy grows, the larger your dividends. After a period of time, you can use your dividends to pay your premium,
Starting a Whole Life policy early in life is often recommended because of the length of time it takes to grow in value. Keep a Whole Life policy for a couple of decades and the dividends will actually grow to a point where you can increase your death benefit and cash value simply by reinvesting your annual dividend, eventually eliminating the need for out-of-pocket premium payments.
Whole Life and Universal Life insurance products vary greatly from company to company. They are subject to a myriad of rules and regulations. Talk to your insurance professional to discuss your needs and to find help choosing the right life insurance product.