Key takeaways
Both whole life and universal life are permanent policies that help protect your loved ones for your entire lifetime while building tax-efficient cash value you can tap into along the way.
Whole life insurance, in addition to providing a guaranteed death benefit, can serve as a more predictable financial anchor, with fixed premiums, guaranteed cash value growth, and the potential for annual dividends from participating mutual insurers.
Universal life insurance, in addition to providing a death benefit, offers greater flexibility by allowing you to adjust premium payments and, in some cases, the death benefit to help accommodate changing financial needs, such as income fluctuations or new business ventures.
Choosing universal life brings more market-based risk, meaning fluctuating interest rates or underfunded premiums could lower your cash value and force higher payments later to keep coverage active.
Deciding between the two comes down to whether you prefer total predictability and guarantees or the adaptability to adjust your funding and policy terms over time.
Life insurance fills a unique role: when you can no longer be there for your loved ones, the life insurance company will deliver an income tax-free check to your beneficiaries.1 While this money can never replace you, it can help them live the kind of life you hoped to provide.
If you’re comparing universal life insurance versus whole life, the core difference is flexibility versus guarantees: universal life offers adjustable premiums and cash value growth tied to interest rates, while whole life has fixed premiums, guaranteed cash value growth, and may pay dividends. For individuals and families choosing between permanent life insurance options, that distinction shapes how much certainty, cash value accumulation, and premium flexibility you get over time.
In this article, we’ll compare universal and whole life insurance on the factors that usually play into the decision-making process: cost, cash accumulation, premium flexibility, guarantees, and dividend potential.
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What are the major types of life insurance?
All life insurance can help provide confidence that your family will have financial stability in your absence. However, there are several types of life insurance, and it’s important to understand the benefits of each type based on your needs and how they compare.
Term life insurance: How does it work?
The least complex form of life insurance is called term. A term life insurance policy provides coverage for a set period of time (e.g., a term you choose), for whatever benefit amount you select. When that period is over, usually 10-30 years, so is the coverage. For many, term insurance can be an economical and temporary form of financial reassurance. Coverage can sometimes be renewed after the initial term expires, although typically at a much higher cost and, in most cases, after a new required medical exam. Term insurance does not have any component of building a lasting financial asset, but it provides coverage until the term expires.
Permanent life insurance: What is it, and how does it differ from term?
The other primary type of life insurance policy is called permanent life insurance. As Financial Strategist Sarah Jenkins put it on Guardian's podcast, "Term life insurance is like renting an apartment; you pay for coverage for a set period, like 10 or 20 years, and when the term is up, the coverage ends unless you renew it at a higher rate. Permanent life insurance, on the other hand, is like owning a home."2
Life insurance coverage stays with you as long as you’re alive and your payments stay current. Your beneficiaries, whether loved ones or a designated charity, will receive a sum of money when you pass away, no matter when that occurs. This kind of coverage is often used for estate planning. The permanent life insurance category has two main variations: whole life insurance and universal life insurance. Within the universal life category, indexed universal life insurance is an option that links cash value growth to the performance of a stock market index, with potential upside subject to policy terms and limits.
How do whole life insurance policies and universal life insurance policies compare?
Both are permanent life insurance policies that can last your entire life, and in addition to the insurance coverage, both can build a cash value, which is money that you can use during your lifetime.3,4 You can’t outlive the guaranteed life insurance protection, provided that you keep the policy in good shape by making sure that your payments are up to date.5,6 A portion of each premium (the amount you pay for your policy) goes toward building your cash value component over time.
Aside from these similarities, whole life and universal life have several differences. One variety might suit a different type of person better than the other, depending on their personal financial goals and level of risk tolerance. Ideally, you would consult with a qualified financial advisor to figure out which is more in line with your needs. Here, we list a few considerations.
What are the key differences between whole life insurance and universal life insurance in terms of cost?
Whole life costs a guaranteed level amount of money each month
In general, a whole life insurance policy may be suited to the type of person who wants guarantees. A whole life insurance policy tends to cost more than universal life and often comes with higher initial premiums due to the guarantees it provides.
You’re buying a financial product that will provide an immediate death benefit and start building up into a permanent asset — and this comes along with several guaranteed benefits. These include fixed premiums, meaning the payments you make each month (or year, if you prefer) won’t ever rise. As the cost of living goes up throughout the years ahead, you can be confident that your whole life insurance premium will remain identical every month and never cost more. In this way, whole life insurance prioritizes guarantees and predictability over flexibility.
Whole life cash values are guaranteed
In addition to this guaranteed premium, whole life provides guaranteed cash value that grows at a guaranteed rate over time. As these values build over time, a loan or withdrawal may be taken to cover future premiums, meaning your whole life policy could even become a self-financing asset. In a participating whole life policy, annual dividends may be paid based on the insurer’s performance, but they are not guaranteed. Those dividends can boost the cash value even further.7
Also, the cash value growth within the policy accumulates on a tax-deferred basis. The combined package — guaranteed death benefit for your loved ones whenever you pass away and cash value that grows in a tax-efficient way — gives you the flexibility to handle life’s unexpected events. Remember that accessing the policy’s cash value may affect how much your beneficiaries receive after you’re gone.
The cash value you build with whole life insurance is a financial asset you can access and use during your lifetime. You can borrow and withdraw from it to help supplement retirement income, help offset college tuition costs, use it as collateral for a loan, and much more. Your cash value will grow at a rate the insurance company guarantees, with potential additional growth provided by a non-guaranteed dividend.
Those guarantees address common concerns: Guardian research finds 41% of Americans worry their retirement savings won't last as long as needed, and 37% worry they won't have a guaranteed source of income in retirement.8
Universal life cash values and premiums can fluctuate
In a universal life insurance policy, the cash value growth depends on the current interest rates associated with the specific type of policy, so it is not guaranteed. Indexed universal life insurance policies, in particular, require careful monitoring of policy performance due to their market-linked nature.9 This type of policy affects both the risk and benefit structure. Universal life policies will all see different growth patterns, and some have a built-in cash value component tied to crediting methods that can vary with market performance.
There is some risk associated with universal life policies. How much premium you pay into the policy and how much you access the cash value will play a role in overall growth. And while flexible premiums may start lower than whole life, that flexibility depends on maintaining positive cash in the policy. Furthermore, interest crediting rates, cost of insurance rates, and investment performance can change and will impact your policy. It’s important to consider coverage with a company that offers a guaranteed interest rate. Speak with a financial advisor to learn more.
If a universal life policy is underfunded, meaning the premiums paid are less than the current charges, the difference is then deducted from the cash value. Your policy can lapse if the cash value falls to a certain point, depending upon your specific contract. Universal life also allows you to adjust the death benefit amount, and in some policies, you may be able to lower coverage when circumstances change to reduce your premiums. You should stay in touch with your financial advisor to help ensure that you keep the account and your life insurance coverage in healthy condition.
Whole life potentially provides dividends
If you buy a whole life insurance policy from a mutual insurance company, you may receive annual dividend payments on your policy. These depend upon several factors, including the insurance company’s profitability that particular year, and are not guaranteed. However, some mutual companies may have track records of delivering dividend payments virtually every year to policyholders. Dividends can be reinvested into your policy to help build cash value faster.
Another financial tactic is to use dividend payments to buy additional insurance and increase the total “death benefit” (the amount of money that will be payable to your loved ones).
You may also use dividends and the additional coverage they purchase to pay all or a portion of your future premiums. Other options are to receive the dividends in cash each year or accumulate them within the policy and withdraw them at a future date.
Note that loans and withdrawals from the policy can reduce the amount of money you will eventually leave to your beneficiaries.
Universal life does not benefit from dividend payments
While universal life does enable you to benefit from interest rates when they’re working in your favor (and lose value when they’re not), in general, you do not receive dividend payments from the insurance company.
How do they compare when it comes to premiums?
The money you pay in every month to purchase your life insurance coverage is called your premium. In a whole life policy, this premium is a fixed payment of a set dollar amount. In a universal life insurance policy, you can raise or lower those payments as you see fit, within the limits of the policy.
Universal life provides more flexibility in payments
If you like choice, the universal life option allows you to adapt when personal circumstances change. Having another child, moving to a different job, or one day taking out a loan to buy a business — all might be instances where a combination of protection and flexibility becomes important.
This type of policy might suit you if you’re envisioning significant income fluctuations or you think that you may want the ability to vary your payments.
Paying in less could eventually result in the need to pay higher premiums in later years to keep your coverage from lapsing, so this type of policy requires active monitoring and comes with a higher level of management responsibility. This option means that your premium payments could vary, providing flexibility to keep your policy in force your entire life.
Both whole and universal life insurance policies can be complex. Before deciding which type of life insurance policy is best for you, consider meeting with a financial advisor to check out the options and discuss what best fits your needs.
