Two popular types of permanent life insurance policies are whole life and universal life insurance. That is, they are intended to extend coverage for life – or for far beyond the coverage available under a term life policy.

Both types of policies share these key characteristics of life insurance:

  • They provide a tax-free death benefit to widows, orphans, and other beneficiaries.
  • They are designed to last many years longer than a term insurance policy.
  • Unlike term insurance, whole and universal life policies build cash value. Policy owners can access cash at any time and use the cash for any purpose.
  • Cash value grows tax-free while the policy remains in force. If you cancel the policy and cash out, you would pay capital gains tax on any proceeds over what you paid in.
  • Both qualify for tax-free exchanges to another life insurance policy, or an annuity.

The differences are mostly in the guarantees under each type of contract. Whole life insurance typically provides for more stability and guarantees, but the initial premium commitment may be higher.

Whole Life

  • Guaranteed-level premium for life
  • Must pay premiums as scheduled
  • Guaranteed cash value growth rate
  • Can be “guaranteed paid up” at a certain age
  • Fixed, with no risk of market loss
Universal Life
  • Cost of insurance goes up over time
  • Flexible premiums and payments
  • Cash value growth rate fluctuates
  • “No-lapse guarantee” riders available for higher premiums
  • Can be fixed or variable; variable universal life insurance sub-accounts may lose money

Whole life insurance provides less flexibility but also holds fewer surprises, while Universal life insurance offers more flexibility and possibly more cash value growth up to a point. In either case, it’s a good idea to monitor any permanent life insurance policy carefully. Stay in touch with your agent and make sure to review the status of your policy each year.

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