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Universal Life vs. Whole Life Insurance

Kailey Hagen
David Chang, ChFC®, CLU®
By: Kailey Hagen and David Chang, ChFC®, CLU®

Our Insurance Experts

Ashley Maready
Check IconFact Checked Ashley Maready
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A permanent life insurance policy is a valuable financial safety net for a family, but in order to choose the best protection, applicants need to understand the differences between universal life insurance vs. whole life insurance. Both offer death benefit protection and a savings component that accrues cash value over time. However, there are some key differences between these two types of policies that can impact your coverage and premiums. Whole life insurance offers more stability while universal life insurance offers more flexibility. Here's a closer look at how the two compare.

What is universal life insurance?

Universal life insurance policies are designed with flexibility in mind. They protect the policyholder with lifelong coverage as long as they keep up with the premiums. This is different from term life insurance, which only lasts for a set number of years.

Universal life policies give the policyholder the option to adjust the size of their death benefit and premium payments as they go. This helps give them a lower premium on average than whole life policies. The policyholder can choose to make an overpayment and reduce the premium during hard economic times and underpay during good times.

How universal life insurance works

Universal life insurance policies offer two things: a death benefit and a cash value component. The death benefit is the amount paid to the policyholder's beneficiaries once the policyholder dies. The cash value component is something the policyholder can draw upon later to help them cover their premium costs or other expenses as they see fit.

When the policyholder pays their premiums, the insurance company keeps a part of the money in exchange for promising to pay out the death benefit. It puts the rest of the money in an investment account. There are several types of universal life insurance, including indexed universal life insurance and variable universal life insurance. But generally speaking, there isn't any sort of guaranteed return on the cash value. It depends on the markets and the investments' performance. In some years, the investments might do really well, while in others, it might be possible to lose money.

Once the cash value accumulates to a certain point, the policyholder can choose to borrow against it or withdraw it to help them pay for medical expenses, everyday bills, or anything else they want. They may also be able to use the money to help fund some of their premium costs.

Universal life insurance policies also enable policyholders to adjust their death benefit on the fly. They can raise or lower their coverage as needed, which can also change their monthly premiums.

Universal life insurance pros and cons

Here's a quick breakdown of the pros and cons of universal life insurance:


  • Flexible premiums
  • Lower average cost
  • Option to adjust death benefit
  • No caps on cash value earnings


  • No guaranteed cash value
  • Policy could become underfunded

What is whole life insurance?

Whole life insurance policies are similar in many ways to universal policies, but they offer less flexibility in exchange for more guarantees. They have level premiums and a guaranteed death benefit. Their cash value component is also guaranteed to grow at a certain rate. All of these things can give a policyholder peace of mind, but a policy like this will cost quite a bit more to obtain.

How whole life insurance works

Whole life insurance also has a death benefit and a cash value component. The death benefit is guaranteed and the policyholder can't easily change it. But there's also no need to be concerned about it decreasing over time.

Policyholders pay a fixed premium and the cash value portion goes into an account where it will grow over time. In addition, whole life policies may offer dividends to policyholders. These aren't guaranteed, but many companies pay them out consistently. Policyholders can choose to spend this money, use it to help pay for premiums, or add it to their cash value.

Just like universal life insurance, policyholders can borrow against this cash value or withdraw it once they've accumulated a certain amount of funds in the account. As with universal life policies, the cash value component is tax-deferred, which means the policyholder doesn't pay any money on their earnings until they withdraw it.

Whole life insurance pros and cons

Here are some of the key pros and cons of whole life insurance:


  • Fixed premiums
  • Guaranteed death benefit
  • Guaranteed cash value
  • Option to earn dividends


  • Higher average premiums
  • Limited flexibility

What are the main differences between universal and whole life insurance policies?

There are two main differences between how universal and whole life policies work: how flexible the death benefit and premium are, and how the cash value is invested.

Whole life is simpler to understand than universal life. This type of policy provides a fixed death benefit and a guaranteed cash value growth.

On the other hand, Universal life is a bit more complicated since it enables policyholders to adjust their death benefit -- and by extension, their premium costs -- over time. This kind of flexibility can be useful, especially for those who experience major lifestyle changes or income fluctuations over time. But costs can change over time, and if the policyholder doesn't pay enough or have enough cash value saved up, their policy could become underfunded and lapse.

Whole life insurance doesn't make it easy to change the death benefit, but policyholders get the comfort of a predictable payment they know won't increase over time. This means there's no risk of the policy becoming underfunded. As long as the policyholder keeps up with their payments, the policy will remain in effect.

As for the cash value component, there's a similar dynamic at work. Whole life insurance offers a guaranteed, predictable rate of growth. But these policies may impose caps on the maximum interest a policyholder can earn during a year.

Universal life policies usually don't have these caps, but they also don't have the same guarantees. If the markets are doing well, the policyholder may learn a lot of interest, while in other years, they may not earn any, or could even lose money with certain policies. In other words, whole life policies offer guaranteed minimum returns, while universal life insurance has variable returns that depend on the market.

The death benefits for both policies, as long as kept in good standing, will be paid out. However, the payout amounts differ between whole and universal life policies. Universal life insurance offers the opportunity to adjust premium payments, and as a result, death benefits, but a whole life policy has set premiums that only offer fixed benefits.

Comparing universal and whole life insurance

The following table breaks down the key differences between the two main types of permanent life insurance policies:

Whole Life Insurance Universal Life Insurance
Fixed premiums Flexible premiums
Guaranteed death benefit Adjustable death benefit
Guaranteed cash value Cash value returns not guaranteed
Option to earn dividends No dividend option
Higher average premiums Lower average premiums
Cannot become underfunded Can become underfunded

How do you choose between universal life and whole life insurance?

Both universal life insurance and whole life insurance can provide peace of mind for policyholders, and which is best often depends on the family's circumstances. Whole life insurance policies are generally more expensive, especially for older adults. So if cost is an issue, a universal life insurance policy might be a better fit.

If you are looking for simple, guaranteed coverage, whole life insurance might be the best option. If you're interested in more flexibility in your premiums and death benefits, and the possibility of greater returns on investment, universal life insurance might be the way to go.

A universal life policy might also be a smart choice for those who think they may want to adjust their death benefit over time. But for those worried about unpredictable investment returns and rising costs, the stability of a whole life insurance policy can be reassuring.


  • Each person must decide whether whole life insurance or universal life insurance is the right choice for them. Understanding how each type works and their pros and cons can help a person make the right call. Remember, the best life insurance plan is the one that provides the most benefits at a price you can afford.

  • No, universal life insurance policies are designed to last the policyholder's entire life as long as they keep up with the premium payments.

  • Universal life insurance and whole life insurance are two different things. Both provide coverage for a person's entire life, but universal life insurance offers more flexibility while whole life insurance offers more stability. Which, if any, is a good fit depending on each person's lifestyle and finances.

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