Whole Life Vs. Universal Life Insurance

Permanent life insurance provides coverage that term insurance cannot. A permanent policy also builds a cash reserve, called a cash value. This cash reserve acts like savings that you can use throughout your life. But what type of permanent policy-- whole or universal -- should you choose?

Whole Life Insurance

Whole life insurance, originally called "term to age 100", is a life insurance policy that uses a combination of premium payments and a cash reserve (called a cash value) to provide a death benefit. Whole life insurance is structured so that the contract is guaranteed to provide a certain minimum amount of cash value as well as a death benefit. On top of that, the cash value is guaranteed to equal the death benefit when you reach 100. Premiums for whole life insurance are usually fixed and guaranteed for a set number of years (usually to 100, but some policies provide a limited-pay option that pays the policy in full prior to age 100).

Universal Life Insurance

Universal life (UL) insurance differs from whole life in that cash values and growth are not guaranteed. Even the death benefits are not guaranteed in a UL contract. Instead, the policy functions on assumptions made about policy performance. Policy performance is based on either investments in variable investments like mutual funds or fixed investments like bonds. What eliminates the guarantees in a universal life policy is that the mortality component is separate from the cash value component. This means that the policy contains a term life insurance policy and a cash account. The policy is paid for out of the cash value account, but the cost of the policy could rise or fall over time. This variability in the contract means that more or less premium may be required over time. If the insurer needs to raise the costs of the policy to meet profit targets or because it is paying out more claims than expected, then the premium payment may increase to keep the policy in force.

Universal life insurance allows you to change the death benefit as well as the premium payment. Additionally, you may elect to purchase the policy so that a level death benefit is purchased and the cash value accumulates "on top of" or in addition to the death benefit or you may choose to purchase a level death benefit in which the cash value acts as a reserve against the death benefit (thus lowering the actual cost you pay for the death benefit over time).


The benefit of a whole life insurance policy lies in its guarantees. The policy values are known in advance. You pay the premium required by the company and you are assured of your policy. The benefit of a universal life insurance policy is the flexibility. Because death benefits and premiums may be changed at any time, you can build a policy that conforms to changing financial goals in your life.


The disadvantage to whole life insurance, for some people, is its rigidity. If you cannot afford the premium payments, you cannot automatically lower them. Likewise, death benefits may not be lowered in many policy types. The disadvantage of universal life insurance is that the flexibility might become a liability. If a policyholder decides to lower premium payments because the policy is performing well, a downturn in the policy performance may require substantially higher premium payments at a time when the policyholder cannot afford the higher premiums. This might lead to a policy lapse.