Life insurance plays a unique role in our life because when we are no longer there for our loved ones, the life insurance company delivers a tax-free check to our beneficiaries or loved ones. Though this money can never replace the loss of a loved one, yet it can help the family live the kind of life that they hoped for.
Permanent life insurance is of two main types, i.e., whole life insurance and universal life insurance. It is not easy to differentiate the key aspects of these two common types of permanent life insurance. As both types offer a financial benefit to the beneficiaries after the policyholder’s death, so it is obviously not easy to decide which policy is the best choice.
As a shopper, if you are looking to buy a permanent life insurance policy, there are chances that you might have asked different questions related to the two main types of permanent life insurance if you look deeper than you will be able to find the differences between the two.
Understanding permanent life insurance
Permanent life insurance is a primary type of life insurance policy. This particular life insurance coverage stays with you as long as you are alive, and you keep on paying your premiums. Your beneficiaries will receive all the cash value after you pass away, whether a designated charity or the loved ones.
The permanent life insurance policy has two different variations i.e., whole life insurance and universal life insurance.
- Whole life insurance
The whole life insurance policy has a fixed premium, and this obviously means that you have to pay the same amount every year for your insurance coverage. Like universal life insurance, a whole life insurance policy can accumulate the cash value over a period of time, which creates an amount that you will be able to borrow against.
One can describe a whole life insurance policy as providing life insurance protection that has a feature of accumulation. This can be a very good choice for you if you want a life insurance policy with level premiums that may stay the same for the entire life of the policy, a cash value accumulation that you are able to use while you are still alive, and protection that is provided to you as long as your premium payments are made on time.
Benefits of whole life insurance
- The cost stays the same
With the whole life insurance policy, the amount of premium that you pay every month will not go up. Over the long run, these premiums may potentially feel much more affordable to you. Though the premium payments in the early years of the whole life insurance are higher than the term life, with the passage of time, the advantages increase significantly. If you plan for retirement, this means that the guaranteed availability of your life insurance at a fixed cost, in your senior years.
- Fixed benefit for the beneficiaries
The decisions that you will be making now will set up your future, even when you are no longer available to financially support your loved ones. You can be confident and depend on the guaranteed amount of money that will go to your heirs or any other designated causes from the death benefit. The ideal thing about this life insurance is that it won’t vanish if you pay your premiums, as it is a financial product that will be in place for your entire life.
- Benefits of tax advantage
With the whole life insurance, you will be leaving a tax-free sum to your loved ones, and your cash value will keep growing on a tax-deferred basis. You are given the option to borrow against your cash value if you require a loan, but you have to pay the money back in, or the amount that will go to your heirs will be reduced.
The tax-free assets you will be leaving for your heirs or different causes after you are gone will be very quick and easy to access compared to the other assets. While taxes might impact your property or any other aspects of your estate, and it could take time to the probate court, but life insurance is nothing like that. Also, the money that you save for your beneficiaries will be covering your funeral expenses also.
- Potential dividends
When you are to buy a whole life insurance policy from a mutual insurance company, you can receive annual dividend payments on your insurance policy. Though these payments are not guaranteed, these can be reinvested into your insurance policy in order to help you build your cash value faster. Another financial tactic can be to use dividend payments to buy additional insurance, and this way increase the death benefit.
- Retirement funding
You can use your whole life insurance policy is an effective way to build your retirement income. If you have the insurance policy for quite a good time to build your cash value, then you can use this amount in a manner to take tax advantage as a part of your financial mix.
- Universal life insurance
The universal life insurance policy offers you flexible premiums that might help you to adjust how much you would like to pay each year by accessing some of your cash value, though you may be required to pay the minimum premium amount so that your policy will not lapse.
It depends on your policy’s potential cash value; this cash value can be used to skip your premium payment, or it can be left alone with the potential of accumulation over time. In a universal life insurance policy, the potential growth will vary as it is based on your policy’s specifics and many other factors.
When you buy a universal life insurance policy, the issuing company establishes a minimum interest crediting rate that is outlined in your contract. Keep in mind that the insurer’s portfolio earns more than the minimum interest rate, and the insurance company may credit the interest that is in excess of your policy. This is the main reason why a universal life insurance policy has the potential to earn more as compared to the whole life insurance policy in some years, while it may earn less in others.
For you, a universal life insurance policy can be a good choice if you want to have flexibility in paying premiums and coverage amounts, a cash value that you are able to borrow till you are alive, and a life insurance protection that is permanent and access to cash values.
Benefits of Universal life insurance
- Lifetime protection
As with all the permanent life insurance policies, the universal life insurance policy also provides you an insurance coverage throughout your life. Therefore, it is permanent protection that cannot expire at the end of a set term. You have to keep in mind that your account has a good standing.
When you grow old, the term or any other policies can cost you significantly more and will be very much harder to get. With universal life insurance, you are covered for life, whether you are in good health, or it is deteriorating.
- Cash value accumulation
As universal life is permanent life insurance, so you have got to build in a portion of money known as cash value that can grow over time. As this amount accumulates, the cash portion starts to earn interest that can build up over time. You also have an option to borrow against your cash value, and the interest rate of the account will be determined by the success of your insurance company.
- More payment flexibility
The biggest advantage of the universal whole life insurance is that you can raise or lower your premium payments as you fit within the limits of the policy. If you pay less at the start, this would certainly mean that you will need to pay higher premiums in the later years in order to keep your coverage.
- Tax advantage
The interest that accumulates with your account is not taxed when it is building up, and this means that you will have a faster accumulation of your cash value. The tax rates and policy vary according to the requirements of the IRS and your income. It is better to review these with a financial professional.
- An option to enhance your features
As universal life insurance is flexible; therefore, you have different options or riders that can be selected. With these choices, you can have an insurance policy that is aligned with your particular requirements. Different riders might allow you to add long-term care as you grow older in order to determine how to extend your coverage to the spouse and allow the use of the death benefit for your care if you happen to get some serious illness.
Whole life insurance vs. Universal life insurance
Both the permanent life insurance product lasts throughout your life, and in addition to offering the insurance coverage, both of these build cash value also, which is the money that you are able to use in your life, or your loved ones can benefit from it after you die.
You cannot outlive this guaranteed life insurance protection, but you have to make sure that you keep the policy in good shape by paying your premiums. You pay the premium every month, and a portion of each premium goes towards building your cash value component.
Aside from the similarities between the whole life and universal life insurance, there are several differences also. This is the main reason why one variety might suit a different type of person as compared to the other. Ideally, you would be consulting a qualified financial professional to help you figure out which is the one that you need.
The flexibility that the universal life insurance policy offers is a key differentiator over the whole life policy. As a result, the premiums of the universal life insurance are normally lower during the high-interest rates as compared to the premiums of the whole life insurance, often for the same coverage amount.
Another major difference is how the interest is paid. The interest paid on the universal life insurance can be adjusted monthly, while the interest on the whole life insurance policy is typically adjusted on an annual basis. This means that during the time of rising interests, the policyholders of universal life insurance may see their increasing cash values at quite a rapid rate as compared to the ones with whole life insurance policies.
There are people who prefer the set death benefit, level premiums, and thus prefer the whole life insurance policy. On the other hand, those people who would prefer to have more options and flexibility when it comes to having permanent life insurance, then universal life insurance can be a better choice.
Choosing the right insurance policy for yourself
It is only you who has the idea of what type of life insurance is best for you. You have a better idea of how much you can afford to spend and what you want to get in return. One cannot deny the fact that whole life insurance is more popular as compared to universal life insurance. It doesn’t mean that the universal policy doesn’t offer any benefits, but universal insurance is not that common.
Most of the consumers believe that whole life insurance is easier to purchase, as more insurance companies offer this particular policy. They also enjoy the fact that they can have coverage with the death benefit and a premium that always remains the same. Other than that, the ability to earning cash on an annual basis helps to make these policies very appealing.
While similar in some respects, both the whole life and permanent life insurance policies have some major differences. As both are considered as permanent life insurance policies, therefore, both remain active throughout the lifetime of the policyholder. By working with a qualified agent or an insurance company representative, you can select the policy that meets your individual requirements, financial goals, and budget.
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