Whole Life Insurance vs. Guaranteed Universal Life Insurance, What’s Better?

Written by CFA Insurance

The concept behind life coverage is quite simple; pay now to help protect your loved ones when you are no more. But when it comes to buying lifelong coverage, things get a bit more complex. Permanent life insurance provides coverage that never expires as long as you continue to pay your premiums on time. The coverage helps guard your loved ones against the risk of financial difficulties should you encounter an untimely death. The permanent life insurance has three common categories; whole life, universal life, and guaranteed universal life insurance. This article gives a thorough comparison between guaranteed universal life insurance and whole life insurance.

What is Whole Life Insurance?

Whole life insurance is one of the types of permanent life insurance. As the name suggests, the coverage lasts your whole life as long as you continue to pay your premiums on good time. And for that matter, the policy offers total peace of mind. So, you should not worry about losing coverage even if your health condition gets worse.

How It Works

Just like other permanent coverage policies, whole life is more of an investment product. This means that the policy not only offers a death benefit to the beneficiaries but it also accumulates cash over time. You may look at it from the perspective of a savings account. In the event death, your beneficiaries will receive a death benefit, plus some additional savings from your policy’s account.

With whole life insurance, you have to pay your monthly premiums for a certain length of time, and in return, you get lifetime coverage. The premiums remain the same throughout the policy’s term. This holds only if the policyholder continues to make timely payments. Your beneficiaries are guaranteed to get a death benefit in the event of your death.

The cash value of your policy generates dividends, although they are not guaranteed. If you do not use the cash value while you are alive, the dividends are reinvested back into the accumulated cash value. So, as long as the premiums are being paid on time, then your policy will never expire.

One good thing about whole life is that you can cash out your accumulated amount any time you want. Once you have build up enough cash value, you may access it during your lifetime. For instance, you may want to:

  • Take out a Loan against Your Policy. You can borrow some cash to pay a down payment for your dream house. The accumulated cash value will act as security or collateral. You will have to pay your insurer back with some interest.
  • Take the Cash to Fund Your Retirement. If you go for this option, your beneficiaries will not get any cash value when you die.
  • Finance Your Insurance Premiums. The cash accumulated value of your policy can be used to pay for your insurance premiums.

Pros and Cons of Whole Life Insurance

Whole life insurance has many potential benefits that can make it a strong part of your financial plan. Still, there are also certain drawbacks that you should know before committing to buying the policy.

Pros

  • Pays a Guaranteed Death Benefit. This is actually one of the greatest merits of this type of permanent life insurance policy. As long as you keep on making timely premiums payments, there will be a payout to your beneficiaries.
  • Predictable Premiums. The amount you pay as premiums will remain intact as long as you have your policy. As such, any changes in your age or health will not affect your premiums whatsoever.
  • It’s a Valuable Asset. If you keep on paying the premiums, whole life insurance builds up a cash value. And over time, you may choose to use the cash to either finance your retirement or make a down payment for your dream home.
  • Pays Dividends. The generated cash value is said to grow at a certain rate based on the assumptions made by your insurer. If the company performs better, it may decide to pay a dividend. The dividends can be reinvested back in your policy or cash it out for personal use.
  • Tax Advantages. Several tax benefits are associated with whole life insurance. For instance, the death benefit is typically tax-free. Also, the policy’s cash growth is tax-deferred. This means you will not pay any tax on the money or dividends earned.

Cons

  • Quite Expensive. As compared to term life insurance, whole life is a bit more expensive. This is because the policy will never expire and also accumulates a cash value.
  • A lot More Complex. With whole life insurance, there is a lot to consider. Depending on your chosen policy, there could be various rates of cash value growth. Also, how dividends are paid out may vary from one company to another, and this could be confusing.

Guaranteed Universal Life Insurance

Many people find whole life to be extremely expensive. For term life, many people fear to outlive their policies and eventually remain without any life insurance coverage. This has raised a lot of concern because living past the end of your term will leave your family without any protection. But the good news is that there is a middle ground between term life and whole life insurance, which is the guaranteed universal life insurance. This is a great choice for people looking to secure affordable lifelong coverage.

What is Guaranteed Universal Life Insurance?

Guaranteed universal life insurance (GUL) is an improvement of whole life and term life insurance. This is so because it offers the affordability of term life and the permanence of whole life insurance. As such, it enables the policyholders to take advantages of the best features found in both term life and whole life. GUL policies do not have any investment value, and thus they have no investment risks.

With a GUL policy, your coverage can be guaranteed for your chosen age. For this type of policy, you can guarantee your coverage to a specific age. Most of the policies offer coverage to ages 90, 95, 100, 105, 110 and 121. The keyword here is guaranteed, which means that your rates and coverage cannot change provided you continue to pay your premiums on time. Also, your rates are guaranteed no matter the changes in the market, your health or age.

Some of the top reasons for purchasing a GUL policy may include:

  • Providing money to your loved ones to cover for your final expenses.
  • Leaving an Inheritance.
  • Protecting your estate from taxes.

How it Works

So how does GUL work? This is a common question, especially to people who have never tried this particular life insurance product. In recent years, guaranteed universal life insurance has become quite popular because of its simple design. Also, because it offers lifetime coverage an affordable price, GUL is becoming more and more competitive.

The traditional universal life and whole life insurance are quite more expensive than GUL. As such, people are going for the affordable option that provides guaranteed lifelong coverage. For GUL to offer lifetime coverage, you need to select a maximum coverage length. This may run from 90 to 121 years. The higher the age, the higher the premiums. However, it is advisable to choose a higher age category to avoid outliving your policy. Outliving your policy means you will have to purchase another policy, which could be very expensive.

Pros and Cons

There are several advantages and disadvantages of guaranteed universal life insurance:

Pros

  • Level premiums for a lifetime. You may select the age limit you want the policy to run up to. The choices run from 90 to 121 years. Throughout the term of your policy, premiums are not going to change.
  • There is a guaranteed death benefit. There is an assurance that your beneficiaries will receive a death benefit.
  • The volatility of the interest rate does not affect your premium payments. In short, there is no market risk at all. Even if the rates are at times low, the policy will not be affected whatsoever.
  • This permanent life insurance product is inexpensive as compared to other products.
  • It is relatively easy to compare this product among insurance carriers. This is because the plan does not have many components.
  • It is a policy with a very simple design that is easy to understand.

Cons

  • Unlike other permanent life insurance policies, this product may not have any cash value component.
  • Even though premiums are lower than in whole life, they are generally higher than those of term life insurance.
  • More expensive than other universal life insurance products.

Comparison

universal life vs whole life

GUL is sometimes referred to as permanent term life insurance. This is because it provides lifetime coverage for a specified term. For example, you may choose your policy to offer coverage up to a certain age, say, 90, 95, 100, 105, 110, and 121 years. So, it is an ideal option for those looking for pure protection but for a longer term. It is regarded as pure protection because there is no cash accumulation as witnessed in whole life. If any cash builds up, it is used for servicing your premiums. In essence, GUL is a good option for people who want guaranteed life coverage for the rest of their lives without any mindset on investment.

But when it comes to whole life insurance, the case is a bit different. This could be an excellent deal for people who have maximized all their investments and wanted to utilize life insurance as an investment vehicle. There is cash value buildup in whole life insurance, which increases over time. The amount can be cashed out. If the policyholder dies, the beneficiaries are paid the usual death benefit plus the accumulated amount in the policyholder’s account. So, in essence, whole life insurance is not usually for those looking for pure protection, rather those who want to use it for both protection and as an investment vehicle.

Both GUL and whole life have one thing in common; they both offer lifetime protection. In both policies, beneficiaries are guaranteed of receiving a death benefit. Also, premiums are level meaning they will not change as long as you continue to pay your premiums on time. However, the whole life is more expensive than GUL more so because of the investment factor.

Which One is For Me?

Choosing between GUL and whole life insurance can be challenging to some individuals. Especially if you are new in both policies, you may find yourself in a confused state. But this should not bother you so much because it is evident that both products offer permanent coverage.

What you need to consider most is your insurance needs. Are you looking for pure protection or you want to add another investment to your portfolio? If you are looking for pure protection, then GUL is the right choice for you. But if you want both protection and investment benefits, then go for whole life.

Also, you need to look at the cost implications. It is obvious that whole life is more expensive than GUL. In fact, it is five times more expensive than GUL. This is due to the cash value build up and the fees associated with the policy. So, the choice depends on your financial muscles. If you are financially stable and can afford to pay premiums without skipping, then whole life is a good bet. Otherwise, consider going for GUL to enjoy maximum protection at reasonable pay.

Conclusion

When shopping around for life insurance products, it is prudent to go for a product that best meets your life insurance needs. For instance, if you are torn between guaranteed universal life insurance and whole life insurance, consider what you want, and you will be able to make a sound decision. For pure lifetime protection, GUL is the best. But if you are looking to adding a capital stock to the economy, then opt for whole life insurance. In both policies, you will receive lifetime or permanence coverage, which has a guaranteed death benefit.

About Jason Hill
About Jason Hill

Jason is the founder of CFAinsure. His years of experience in the business have helped him serve and represent hundreds of clients. Jason ensures his clients are well educated and informed by putting their needs first. Each appointment is tailored to individual needs, via specific materials and educational tools. The real benefit for his clients is the end result: peace of mind.

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