Universal Vs Whole Life Insurance
Permanent life insurance comes in many flavors
, two of which are whole life and universal life insurance. All permanent policies offer a cash value component in addition to the death benefit. Most permanent life consumers find it difficult to choose between these life insurance policies, because each comes with its own advantages and disadvantages. This article will give you a better idea of the differences between the two policies.The basics of whole life and universal life policies
Both these policy types have 4 basic components:
-The mortality cost (the part of your premiums that actually goes towards your life insurance, or the death benefit)
-The cost of administration and policy maintenance: Since part of your payments is used to build up a cash value, separate from the death benefit, this cost will cover the life insurance companys expenses in managing your account.
-The cash value (also referred to as fund value or surrender value). This is the amount left over in your account after the above-mentioned costs have been paid. This is the savings and investment component of your policy.
-Finally, you are also entitled to an interest on your savings and investment. These are the returns from your policy, and will be credited to the cash value component of your policy every year.
Whole life policies
Whole life is the basic variant of permanent life. In the past, whole life and permanent life were synonymous terms because whole life was the only type of permanent policy.
In a whole life policy, the amount of premiums and the amount of death benefit remain fixed for the life of the policy. You will have no say in where your money is invested, and the life insurance company is under no obligation to disclose the rate of return on your policy. The life insurance carrier is also not entitled to disclose the amounts of the savings and administration cost components to you. The savings will depend on factors such as savings in the mortality cost, excess interest, operating expenses, etc. and your cash value component will totally depend on what the insurance company is willing to pay you. This is a major drawback of whole life policies.
Universal life policies
Universal life is a more recent variant of permanent life policies. It offers the policyholder a lot of flexibility in terms of how and where they want to invest their money. The premiums are flexible, and the death benefit is adjustable. However, because they are totally dependant on market performance, the cash values of universal life policies are interest-dependant, and therefore high risk.
In a universal life policy, the details of the components of the policy are transparent and the life insurance company will disclose the mortality cost and administrative cost to you.
Universal life policies are often compared to mutual funds, but one must remember that any money inside a life insurance fund grows tax-free, while mutual fund gains are taxable.
Whole life Vs Universal life
Now that we have understood the basics of both policies, it is time to discuss the pros and cons of each of them.
Whole life policies are straightforward for the policyholder. Both the premiums and death benefit are decided in advance, so the returns are guaranteed as long as you regularly pay your premiums. On the contrary universal life lets you add to the policy whenever you have excess cash reserves. The premiums and death benefit are not cast in stone. It all depends on how much the policyholder wants to invest, and how well the investments perform.
Because universal life policies performance is market-driven, only those who know the intricacies of the stock markets usually buy them. The risks are high, but there is no ceiling on how much your cash value can grow to. However, a wrong decision could see your cash value reserves deplete considerably. Further, in periods when interest rates drop and stagnate, the cash value too, drops, meaning you will have to pay a higher premium to bridge the gap. It is all left to how well you can direct your investments. It is therefore not for everybody, and the average consumer prefers to opt for whole life policies instead.
Both policies have high administration and mortality costs. Whole life policyholders are not given the breakup of their costs, whereas in universal life these charges are made transparent.
Both policies have high administration and mortality costs, but on account of being life insurance policies, investments in both are tax-deferred.
Which permanent life policy is best for you?
The intent of whole life insurance is usually a genuine need for life insurance, coupled with the expectation of cash returns on your investment. However, in universal life insurance, the intent is more often than not, return-driven. Whole life is a safe and guaranteed investment, for those who are more comfortable with a fixed premium and death benefits. However, for those who are looking for more flexibility, have knowledge of the stock market, and the time to monitor their investments, universal life policies are an excellent choice.
Before buying a life insurance policy make sure you go through all the available avenues, and study the benefits and features of all permanent and term life insurance policies. Always compare life insurance policies and only buy from reputable life insurance companies.
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