Whole life and universal life insurance policies have similarities and important distinctions. Both are types of permanent life insurance, which means they provide coverage for your entire life as long as premium obligations are met (which is different from term insurance). Also, you can build cash value in either type of policy. Here’s what you need to consider to choose the coverage that’s the right fit for you.
1. Your Budget
Would fixed premiums or adjustable ones be a better match for your budget needs? Whole life insurance has fixed premiums. After you pay the initial premium on a universal life policy, you decide how often and how much to pay your premiums as long as you meet the policy’s minimums.
2. Your Risk Tolerance
Your investment in a whole life policy has low risk. The cash value accrues interest at the rate set by your insurer. Some whole life policies are eligible for dividends. You can choose to reinvest your dividends in the cash value or to have them sent to you. Dividends may also be put toward premium payments.
Selecting universal life, on the other hand, requires a higher risk tolerance. The rate of return on the policy’s cash value is not guaranteed. Rather, returns go up or down with market conditions. Some universal life policies are linked to the performance of a specific index like the Nasdaq 100.
3. The Needs of Your Loved Ones
Since whole life provides a fixed death benefit, it’s easier to plan for the future of loved ones who depend on your support. Fixed benefits may be particularly helpful if your loved ones include an aging relative, a child with special needs, or anyone else who won’t be able to develop their own means of support.
Universal life allows you to pick between a fixed death benefit and a benefit you can adjust up or down. This feature is beneficial if your personal circumstances change. For example, a married yet childless adult may initially choose a smaller benefit since it’s likely that only one person — the spouse — depends on the insured’s income. Should this couple have a baby, the insured person may want to increase the death benefit because more people rely on the insured person for support.
Your local independent insurance agent can answer questions and help you choose the right type of policy for you and your loved ones. Contact Vargas & Vargas Insurance today for friendly, helpful service.