Many people confuse whole and universal life insurance, thinking that the two terms are interchangeable. This is not surprising, considering that they both fall under the category of permanent life insurance coverage. Unlike term life insurance, which has a set term after which the policy expires and unused benefits are lost, permanent life insurance offers a means of keeping your coverage until the day you die, no matter how many years down the road that is, so long as you continue to pay your premiums.
When it comes to permanent life insurance policies, the similarities don’t end there. Both universal and whole life coverage come with a savings feature that allows you to add cash value to your policy. A portion of your premium payment goes toward your actual insurance, or death benefit, while the remainder is applied to a savings/investment account. Over time, the cash value builds and can be used in a variety of ways. It could simply be added to your death benefit, increasing the amount your beneficiaries receive following your death. Or you could take out loans against the cash value (and if you fail to repay them, you’re really only taking money from yourself or your beneficiaries). Or you might want to use the cash value to pay premiums or purchase more coverage. But there are also differences between universal and whole life policies.
Whole life insurance can be a bit pricier in terms of premiums. The reason for this is stability. The premiums for your whole life policy are calculated based on a number of factors, including anticipated interest rates, your life expectancy (derived from actuarial tables), and so on. Regardless, once the premium is set, you are guaranteed death benefits so long as you faithfully pay your premiums. Although universal policies offer a lot of flexibility to adjust benefits and payment plans, they may not be as stable. If interest rates take a dive, your policy could become worthless. In this case, a whole life policy is certainly the safer option, even though it is not as outwardly attractive as a flexible universal policy.
That said, you will enjoy many benefits when you choose a whole life policy. For example, your premiums will never change. With a universal policy you have the flexibility to pay more or less, within set limits. But if your account earns less interest than anticipated, you might be on the hook to pay higher premiums in order to keep your account afloat. If you plan accordingly, this shouldn’t happen, but it is a possibility. So again, if you’re looking for safety and stability, whole life is the right option to select.
Whole life policies offer more than just the option to take out loans on a policy’s cash value and the opportunity to surrender your policy in order to get the entire cash value you’ve accumulated over the years. In fact, you could also elect to receive annual dividends from your investments. The cash component of your policy is interest deferred, which means you’ll pay interest if and when you take money from the account. So you will pay interest on the dividends you receive. But you can get some money annually while maintaining your cash balance, partially covering the expense of your premiums each year. This and other benefits make whole life insurance a fairly appealing option to consider.
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