Whole Life Insurance vs. Universal Life Insurance: Which Is Better for You

Which is the better policy when it comes to whole life vs. universal life (UL)? That depends on your finances, investment plan, and the kind of death benefit you want to leave behind for your family. 

Both whole life and universal life insurance are permanent policies that last for your life. They also allow you to invest a portion of your annual rates. These types of policies are known as cash-value insurance because they offer an investment savings account that policyholders can borrow against or use to cover life insurance payments.  

What is the difference between whole vs. universal life insurance, and which one is right for you? Keep reading to learn more about whole and universal life insurance. We discuss the pros and cons of each policy type and how rates vary between universal vs. whole life.

What is the difference between universal and whole life insurance?

What is the difference between whole life vs. universal life insurance? Both types of policies will last for the duration of your life. Unlike term life insurance, there is no end date to the policy. However, the biggest difference between the policies is fixed rates and benefits.

Both policies might be permanent, but whole life insurance is fixed. You can’t change annual rates, death benefits, and other policy details. Universal life insurance, on the other hand, has more flexibility. You can change your rates, death benefit, and even your investments once you meet the cash-value threshold of your policy. 

Other small differences between whole vs. universal life insurance plans involve your interest rates and what types of investments you can make. Keep reading for a breakdown of the pros and cons of UL and whole life insurance.

Pros and Cons of Whole Life Insurance

Whole life insurance policies combine coverage with savings opportunities. A portion of your annual rates are put into a high-interest bank or investment account, and the total cash value of your policy increases with each payment.

You can take loans out against the policy once you meet a minimum cash value threshold, which varies by company. But as long as you pay your life insurance rates on time, you’ll be covered, and your beneficiaries will receive a long-term investment payout after your passing. 

Other advantages to buying whole life insurance are:

• Whole life insurance rates are typically fixed, meaning they won’t increase as you get older or change with market fluctuations.
• Whole life policies pay out annual life insurance dividends based on your investment earnings over the year.
• Cash value is guaranteed, and you can use the cash toward future life insurance payments or to cover medical costs.

Unfortunately, the biggest disadvantage of whole life insurance is its increased rates. Rates for whole life are more expensive than other types of life insurance.

To get the best whole life insurance rates, invest in a policy while you’re young and have no pre-existing medical conditions. This will ensure you receive the lowest whole life insurance quotes possible.

Pros and Cons of Universal Life Insurance

Universal life insurance offers more flexibility than whole life — you can change your rates and benefits. However, medical exams are required if you decide to change your death benefits, which will impact your insurance costs.

But with every UL payment you make, a percentage will go into an investment account that accrues interest based on the stock market. So if the stock market is up, you can earn more than you would with a whole policy.

You will also have different investment options depending on the type of universal life insurance policy you buy. The different policies are:

• Guaranteed universal life insurance. Your death benefits, cash value, and rates are guaranteed regardless of stock market performance.
• Equity indexed universal life insurance (IUL). Policyholders can choose where to invest the portion of their life insurance rates.
• Variable universal life insurance. Policyholders can transfer funds to tax-deferred sub-accounts with different investment options.

You can increase, decrease, or stop your payments once you meet the threshold with each UL policy. However, be sure to check with your provider about the status of your cash value before stopping payments. If your cash value is insufficient, it could cause your policy to lapse.

What is the disadvantage of universal life insurance? The main risk with UL is that your interest rates are usually dependent on stock market conditions. If the stock market performs poorly, your potential savings growth will be minimal or non-existent.

Read more: Equity-Indexed Universal Life (EIUL) Insurance

How much are whole life vs. universal life insurance rates?

As you get older, your life insurance quotes will be higher. This applies to both universal and whole life insurance policies. Your age, gender, and medical history play the biggest role in life insurance underwriting guidelines. 

So, which costs more — whole or universal life insurance? This table shows the average monthly whole life insurance rates by age for a preferred medical history:

Whole Life Insurance Average Monthly Rates by Age at the Preferred Rate

On average, whole life insurance policies are the most expensive, but you will get cheaper rates if you buy coverage while you’re young. You will also get cheaper UL rates in your 20s and 30s. Policyholders in their 40s pay nearly double the average rates for a 20-year-old.

Average Monthly Universal Life Insurance Rates by Age

Whole life insurance rates cost twice the average UL rates, but these rates are locked in and will never increase throughout your life. However, universal life insurance rates will change if you modify your death benefits.

To find the most affordable whole and universal life insurance, we recommend comparing rates from at least three companies before buying. 

How to Choose Between Whole Life Insurance vs. Universal Life Insurance

The right type of permanent life insurance for you depends on various factors, including your finances and investment portfolio. For example, a whole life insurance policy is a great long-term investment if you have a dependent adult child or to help your family with your post-death expenses. However, purchasing this policy for reasonable rates might be difficult if you are older.

A universal life insurance policy will have more affordable rates, especially if you are older and in excellent health. UL policies also provide more potential for growth since interest rates are wholly dependent on the stock market. Of course, not everybody is comfortable gambling with their life insurance coverage, but the payout can be more than with whole life.

Unfortunately, you won’t receive annual dividends from your investments with universal life. That is unique to whole life insurance policies and why they have more expensive annual rates. 

If you’re interested in choosing between whole and universal life insurance, you may want to talk with a financial advisor to decide which fits best with your investment portfolio. We recommend comparing quotes from local companies to determine average rates near you first, then using these rates to narrow down insurers that offer the kind of cash-value life insurance you need.

Case Studies: Whole Life Insurance vs. Universal Life Insurance

Case Study 1: John’s Financial Security

John, a 35-year-old married individual with two children, is seeking life insurance coverage to ensure his family’s financial security in the event of his untimely death. After evaluating his options, John decides to explore both whole life insurance and universal life insurance.

With whole life insurance, John appreciates the fixed rates and benefits, knowing that his premiums and death benefit will remain consistent throughout his lifetime. He sees the long-term investment aspect as a way to provide his family with a stable financial safety net.

However, John recognizes that the rates for whole life insurance tend to be higher than other types of life insurance. On the other hand, universal life insurance offers John more flexibility.

He can adjust his rates, death benefit, and even investment choices once he reaches the cash-value threshold. This option appeals to John, as he wants the ability to adapt his policy to changing circumstances in the future.

Case Study 2: Emily’s Retirement Planning

Emily, a 45-year-old single professional, is primarily focused on building her retirement savings while also securing life insurance coverage. She wants a policy that allows her to invest a portion of her premiums and potentially benefit from market growth.

Considering her goals, Emily decides to explore universal life insurance. She understands that her payments will go into an investment account that accrues interest based on stock market performance.

This potential for higher growth aligns with her retirement planning strategy. Emily is aware that the interest rates of universal life insurance are usually dependent on stock market conditions.

While this introduces some risk, she believes that the potential rewards outweigh the potential downsides. She plans to monitor the market and adjust her investment choices accordingly.

Case Study 3: Sarah’s Affordable Coverage

Sarah, a 50-year-old individual in good health, is looking for affordable life insurance coverage. She wants to provide a death benefit for her loved ones without compromising her financial stability.

Considering her age and financial situation, Sarah leans towards whole life insurance. Although the rates for whole life insurance tend to be higher than other types of life insurance, Sarah knows that her premiums will remain fixed throughout her life. This predictability gives her peace of mind and allows her to plan her budget effectively.

Sarah understands that the annual rates for whole life insurance are influenced by factors such as age and pre-existing medical conditions. To secure the most affordable rates possible, she decides to purchase the policy while she is still relatively young and in good health.