Considering Whole vs. Universal Life Insurance: What to Know

Liz Caldwell is a senior director of Insurance Solutions at Northwestern Mutual.

Life insurance is not a one-size-fits-all product. Which policy you choose depends on your financial situation, age, health and preferences. Some people like coverage with guarantees. Some prefer flexibility when it comes to premiums and benefits. And others simply want death benefit protection.

Because your needs and goals are unique, you want to select a life insurance policy that can address your needs, help you reach your goals and fit within your budget. So, when you’re ready to make a decision about protecting what matters most—your spouse, your family and/or your business—it’s good to know you have life insurance options.

There are two main types of life insurance: permanent and term. And there are different kinds of policies in each of those categories. With permanent life insurance, two options available to you are universal life (UL) and whole life insurance. We’ll help you understand the differences between the two so you can understand if one (or both) fits in your plan.

How do universal and whole life insurance work?

Since universal and whole life insurance are permanent policies, they share some common features and benefits. Unlike term life insurance, which offers death benefit protection only during the policy term, universal and whole life insurance offer lifelong financial protection. Once you’re approved for a policy, and as long as you pay the required premiums, your beneficiaries will receive a payout someday.

Universal life and whole life policies also allow you to accrue cash value, which can be a source of cash in the future via a policy loan—no approval needed¹. Your death benefit will be reduced by the amount of the loan plus interest until it is repaid. You can use the money to supplement your retirement income or spend it as you like.

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

Whole life insurance can offer you more stability because it has built-in guarantees. Your premiums and death benefit are guaranteed to remain the same for the life of your policy. Whole life insurance also offers guaranteed cash value growth. And any dividends² can allow your death benefit to grow and allow your cash value to grow more quickly than what’s guaranteed.

In comparison, universal life insurance has more flexibility. With a universal life insurance policy, you can make adjustments to your premium payments and your death benefit to accommodate your changing needs and financial situation.

There are also different types of universal life insurance with different benefits. Variable universal life insurance’s (VUL) cash value is invested in the market via subaccounts chosen by you. These subaccounts may reflect a variety of asset types and account managers. Another type of policy called indexed universal life insurance (IUL)³, is based on a market index and not the actual market. Its performance is based on the rules of the contract and not actual market performance, as it may have a cap on the maximum market rate or a floor on the lowest negative market rate. Even though IUL and VUL may potentially offer greater returns, the market risk and caps on IUL may have a negative impact on the cash value.

Can universal life insurance be converted to whole life?

Yes, if your definition of a conversion is moving the cash value from one policy to another without paying any taxes. This can be done via a 1035 exchange from the universal life policy to the whole life policy. You may need to be underwritten by the company issuing the whole life policy before the cash value can be transferred from the UL policy to the whole life policy.

What is better: universal or whole life?

Both universal and whole life offer different benefits, so it’s not a question of whether one type of coverage is better than another. Rather, it’s more about understanding the differences between whole life and universal life insurance.

Your Northwestern Mutual financial advisor can help you explore the differences between different policies, helping you to find the best fit. They’ll also show you how life insurance can work with other savings tools to benefit your financial plan as a whole.

This article is not intended as legal or tax advice. Northwestern Mutual and its financial representatives do not give legal or tax advice. Taxpayers should seek advice regarding their particular circumstances from an independent legal, accounting or tax adviser.