What’s the Difference Between Whole Life, Universal Life, and Variable Life?

There are four types of life insurance available on the market — whole life, universal life, variable life and term life. The first three are referred to as “permanent” policies that expire when you die. 

Term Life

Term life has a pre-set expiration date — usually 10–15 years and is referred to as a “terminal” policy. Buying a term policy is cheaper than other forms and typically works well for younger families trying to protect themselves during their working years.

Whole Life

Whole life insurance covers you for your entire life which is what makes it “permanent”.

  • Has a cash value included in the premium.
  • Allows for cash withdrawals and paid dividends according to contract stipulations.
  • Guaranteed amount of money paid at the time of your death.
  • Accrues interest at the current rate of interest
  • Interest accumulated may be tax free.
  • Death benefit is guaranteed rather than flexible. Each one of your payments is divided up and applied between administrative costs for overseeing the policy, toward your insurance portion and for any investment and/or cash portion of your policy. Even though there is a cash value that you may be able withdraw, there may be terms in your contract that limit when or how much of the cash value may be removed.
  • Usually the highest initial price of all forms of life insurance because of guarantees.
  • Increasing or decreasing coverage is normally not possible.
  • Interest is lower than nearly all investment options. The trick to getting the most out of a whole life policy is to get it while you are still young which guarantees the lowest monthly costs for a policy that would cost you two or three times that amount in another ten years. 

Universal Life

Universal life shares some similarities to whole life — permanent for the life of the policy and has a cash value component. But unlike whole life, there is some flexibility in this policy.

  • Low cost protection similar to cost of term policies
  • Added feature of cash value savings component
  • Amount of death benefits, amount of monthly payment and the amount of savings can be altered as your circumstances change — with some additional requirements
  • Allows use of cash accumulations to help pay premiums Many insurance companies highlight the cash value component as a means of paying your premiums for the rest of your life after a certain amount is accumulated. The truth is that the cash value may not cover the premiums for more than a year or two since the cash accumulates according the interest rate and the interest rates are reset periodically by the insurance company.

You can periodically request what is called an inforce illustration or point in time illustration to assess how the policy is doing. It should be noted that regardless of the form of policy loans and partial withdrawals may decrease the death benefit and cash value and may be subject to policy limitations and income tax. If the interest decreases, your policy isn’t making as much money as it did three months previously. If it increases, you’ll be making a little bit more.

Over a period of several years, when interest could decrease more than increase, you could be earning less than the monthly cost of the policy.

Nonetheless, when the amount of interest is really low choosing to use the cash accrued to help pay premiums is a good way to use it since withdrawing the savings component is treated as a loan where you may have to pay more interest than the policy is earning.

Variable Universal Life 

This is a variation of a universal life policy and should not be confused with either universal or whole life. It’s a combination of the two and generally sold as a universal policy. The two main differences between universal and variable universal is in the way that the death benefit is paid and the policy holder’s option to select the type of investment portfolio for cash to accrue.

  • Pays the face value plus cash value accumulated to date — variable death benefit.
  • Pays cash value at time of death — which is a non-guaranteed amount but referred to as a death benefit.
  • Investment portfolio options vary depending on insurer but generally include mutual funds, referred to as subaccounts, and money market securities. Like a universal policy, you can alter or modify the amount of the death benefit you want to carry. If you do this, you should realize that by altering the original policy contract you may be subject to “surrender fees” even though you are continuing the general policy. By modifying any single element of the contract (policy), you are in effect cancelling the policy and purchasing a new contract with similar traits.

The investment portfolio is a compilation of several different types of investments and while you are allowed to choose which compiled option you prefer, you are not allowed to select the actual investment items. If your investment portfolio performs below your expected levels, your premiums might actually be increased to continue the coverage of your policy.

If you decide to utilize the loan option from your variable universal policy, you’ll discover that it will have specific limitations attached and tax-deferred cash values may be excluded in your state. Most variable universal life portfolio options are offered by degrees of risk that you are willing to take. Having clear goals and a fairly good understanding of how the different types of investments operate is essential to purchasing any variable product.

Because variable universal life is considered a security, you will get a prospectus for the policy.

Read it and ask your financial advisor to explain anything that you are unsure of no matter how trivial it may seem to you. Some prospectuses are

written for the financial wizards not the financially fundamentally educated and tend to read like a math quiz instead of an explanation. 

Variable Life

If you are one of the financial investment wizards in the world, this one’s for you — at least in addressing your market divination skills. This is the real deal variable life not to be confused with the variable universal life policy. There are two significant differences between variable life and all other policies:

  • Policy has two separated accounts — the general or liability account and the separate account
  • Liability account belongs only to the insurance provider for his risk in the policy
  • Separate account belongs to the policy holder and is comprised of investment funds within the company’s portfolio options

Where with variable universal life you select from one of the combined investments portfolio options, with variable life you can narrow the field to individual types of investments and choose one or more as you prefer.

So, if you find that the returns on stocks is better than on money market accounts (which for the last several years is true), you may want the bulk of your premium invested in stocks instead of spreading them out. You can usually switch from one type of investment to another under these policies.

  • Guaranteed minimum death benefit is an offering for a separate premium which is usually done through the application of “an assumed rate of interest” .
  • Minimum cash value is never offered as a guarantee as you are the one that chooses the investments used to fund the policy and therefore, you are the one to bear the brunt of the risk.
  • Loans are available against substantially accumulated cash values but even those are restricted to cover any fluctuation in the investment funds.
  • Cash values may be used to reduce your premiums with most insurers but expectations beyond partial payment is unrealistic. You are required to read the prospectus and sign off on your full understanding of what was presented according to SEC regulations.

The agent selling this policy type is required to have a life insurance license from your state plus a FINRA securities license.

These policies are designed for those with extensive investment experience and skills that go beyond those of the beginning investor. This is a high risk policy with only a minimal guarantee of benefits for your loved ones. But, if you are interested in growing investments in a tax deferred account, this is the policy to check into before making a final decision.