Whole Life Insurance Pros and Cons | Guardian

Whole life insurance is the most popular and simplest type of permanent policy, but it’s not the only permanent option.

Universal life insurance, also called UL, is a type of permanent life policy that offers more flexibility than whole life insurance but fewer guarantees.5 unlike whole life insurance , universal life insurance premiums are variable, allowing you to raise or lower your payments within certain limits.6 This can make the benefits of permanent life insurance easier to achieve. however, universal life insurance offers fewer guarantees: minimum premium payments can eventually slow cash value growth and erode its value. this may result in the need to pay more money in later years to maintain the same level of coverage or death benefit. however, with sufficient funds, the cash value is guaranteed to grow at a specified minimum interest rate with tax benefits. Depending on the insurance company’s return on investment or market interest rates, it may also grow faster. however, universal policies are unlikely to earn dividends, even when issued by a mutual company. Other types of universal life insurance policies are available that can provide even more potential for cash growth, albeit with fewer guarantees.

Reading: What are the advantages of whole life insurance

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Indexed Universal Life, also known as IUL, policies link cash value growth to the performance of an index, such as the S&P 500, with caps on minimum rates of return and maxims7. For example, in a year when the index is up 20%, your money may only see a 10% to 12% gain. conversely, if the chosen index is negative for the year, your cash value may stay the same or even increase slightly (depending on the specific terms of the indexed policy). each insurance company has its own selection of indexes available and you may be able to choose more than one. You can also allocate a portion of your cash value to a fixed-rate interest account.

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Guaranteed Universal Life policies, also called GUL, offer little or no cash value. Instead of providing cash value growth, this policy is structured to provide permanent coverage at lower premiums than permanent life insurance. In many respects, it acts like a term policy that ends on the expiration date, that is, when the policyholder reaches a specified age (usually 100 or older). This type of policy is not suitable for generating wealth.

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Variable Universal Life policies, also known as vuls, give you the option to link cash value growth to pooled investment subaccounts.8 With these policies, the insurance company gives you the same information about assets, performance history, and rates as a brokerage, and you get to choose how much to invest in each option. however, unlike whole life, your cash value can decline if the funds you select don’t perform well.

Finally, as mentioned above, term life insurance is a popular form of life insurance, but it has no cash value and does not provide permanent coverage. term life insurance only lasts for a specific amount of time (or “term”), although many policies can be converted to a permanent policy at some point before they expire. you’re only paying for life insurance without any wealth-building components, so the cost can be significantly lower than whole life insurance.

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