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Both of these life insurance policies fall under the umbrella of permanent life insurance. Permanent policies offer lifetime coverage, in contrast to term insurance, which promises a death benefit payout within a predetermined time frame. You will receive the cash value of the policy if you cancel your permanent life insurance (minus any fees). 1
Both of these kinds of life insurance contracts normally have two parts: an investment or savings piece, and an insurance portion. Due to this, the premiums are higher than those for term insurance. Additionally, policyholders may take out loans against the policy’s cash value. Permanent life insurance is frequently referred to as cash-value insurance for this reason.
Whole life and universal life insurance policies differ significantly, despite sharing some similarities. Because of its assured cash value growth and fixed premiums, whole life insurance delivers consistency. Consumers who purchase universal life insurance (UL) have options for their plans’ premium payments, death payouts, and savings components. 1 We’ll examine each of these kinds in more detail here.
Main Points
Permanent life insurance comes in the forms of whole life and universal life (UL) insurance.
Consistent premiums and assured cash value growth are features of whole life insurance.
Although there are fewer assurances with universal plans, they offer adjustable premiums and death benefits.
With either a whole or universal insurance, the cash value may be withdrawn or lent against.
A whole life policy will often have greater premiums than a comparable UL coverage.
Integrated Life Insurance
No matter how long you live, whole life insurance provides coverage for the rest of your life. The death benefit will be paid to your beneficiaries as long as you continue to pay the premiums. This policy is ideal for long-term obligations like caring for an adult kid who is dependent or paying for estate taxes after someone has passed away.
The Operation of Whole Life Insurance
This sort of life insurance combines coverage with savings, which is one of its features. Your insurance provider deposits a portion of your premium payments into an investment or bank account that pays a high rate of interest. The value of your cash increases with each premium payment. This portion of your insurance that deals with savings increases your cash worth tax-deferred. It’s crucial to maintain whole life insurance for as long as you live because it’s designed to help people achieve their long-term objectives.
Since you cannot borrow against the policy’s face value, you must satisfy a minimum cash value condition in order to do so.
Whole Life Insurance: Advantages and Drawbacks
The guaranteed cash value of whole life insurance coverage is one appealing aspect. It provides some financial flexibility in case of an emergency because you can borrow against it or surrender your policy to collect the cash value.
Your company also gives you some flexibility by paying dividends. You can choose to get them yearly in cash, let them accrue interest, utilize them to lower the cost of your insurance or purchase more coverage.
However, this policy is extremely pricey compared to term insurance because to the level premiums, set death payments, and alluring living incentives (such loans and dividends). To be able to afford whole life insurance in the long run, it is recommended to purchase it when you are younger.
Continuum Life Insurance
Because of the flexibility it provides, universal life insurance is also known as flexible life insurance. Once there is money in the account, you are free to change the death benefit amount and pay your premiums whenever you want in any amount (within certain limits). 2
How to Use Universal Life Insurance
A portion of each payment you make to your universal life insurance plan is invested, and any money earned is added to your account. Your cash worth rises as a result of the tax-deferred growth of the interest you earn.
When necessary, you can amend the death benefit, raising it (typically contingent upon a medical exam) if your circumstances change or lowering it to minimize premiums. As an alternative, if you have enough money in your cash value account, you can use it to pay premiums. Universal Life Insurance: 2 Advantages and Disadvantages
The appeal of universal life insurance is that you can change the face value of your coverage without giving up your policy. You can modify your premium payments when your obligations or financial situation change. You can even cease making payments altogether.
The option to partially withdraw or borrow money from the cash value is another benefit. Repeated withdrawals, however, are not advised as they may lower the cash value amount and leave you with little in a moment of need.
The interest rate, which is frequently influenced by market circumstances, is the primary drawback of universal life insurance. If the policy performs well, there is a chance that your savings fund could increase. The predicted returns, however, are not earned if it performs poorly. The fees are another another drawback. When you cancel your policy or take money out of the account, surrender fees might be charged.
Before withdrawing the premiums, make sure to talk to your insurance consultant or agent about the condition of your cash-value fund. If you stop making premium payments and your policy has insufficient cash value to meet the cost of insurance, your policy may expire.
Key variations
The guarantees between whole life and UL are the main distinction for policyholders. Whole life insurance has level premiums, a guaranteed death payout, and a rising cash value. The annual dividends that are credited to policies are what cause the increase in cash value.
The flexibility of universal life replaces guarantees. Your policy’s cash value and death benefit may change depending on how much you pay for it each year. UL insurance plans are credited according to interest rates rather than dividend payments. This may result in an unfunded UL insurance, which would raise premiums. The coverage may expire if certain payments are not made.
For the guarantees you receive with whole life insurance, you pay higher premiums. Although an equal UL policy will be less expensive, policyholders will still be exposed to some risk.
Key distinctions between Universal Life and Whole Life
entire life
omnipresent life
a set of premiums
adjustable premiums
Unconditional death benefit
could let you change the death benefit amount
offers possibility for cash worth that you can use while you’re still alive
Earnings are assured.
Over time, interest rates may fluctuate.
increased premiums
reduced premiums
is never going to be underfunded
may experience underfunding and expire
Key distinctions between Universal Life and Whole Life
Particular Considerations
Your family status, financial situation, appetite for risk, and need for flexibility will all affect the best type of life insurance for you. You can look into various types of life insurance besides universal and whole life, like term, group life insurance, and others.
Whatever kind of insurance you choose, make sure to compare the providers you’re considering as well to make sure you’re getting the best whole life or universal life insurance you can.
Term life insurance: What Is It?
Term life insurance is a cheap choice that offers a death benefit for a predetermined period of time, such 10 or 20 years (the term). Term insurance policies do not build up any monetary value like whole or universal life insurance. The least expensive choice is frequently term life.
Indexed Universal Life Insurance: What Is It?
A type of universal life (UL) known as indexed universal life (IUL) links the policy’s cash value to the performance of an index of stock market indicators, such as the S&P 500. The amount of cash value to be allocated to either a fixed account or the equity-indexed account is up to the policyholder. There will be a ceiling, such as 12 percent annually, above which the policy will no longer credit the account. Therefore, the policy will only earn 12 percent even if the S&P increases by 20% in a particular year. Additionally, returns may be subpar if the index declines, though there are frequently floors to limit drastic losses.
What is the duration of Universal Life?
A universal life insurance policy will remain in effect indefinitely, up until the policyholder’s death, provided it is fully funded and premiums are paid on time.
Can a Term Life Policy Be Converted to a Whole Life Policy?
You might be able to change your term insurance into permanent coverage without getting a new medical exam, depending on the insurance provider and the terms of your term policy. Based on your age at the time of conversion, the new whole life policy will have higher premiums.