How to Build Wealth with Universal and Whole Life Insurance

The main purpose of life insurance is to provide a death benefit or lump sum to someone you choose, like a spouse or child, after you pass away. Some life insurance policies, like whole life insurance and universal life insurance, do more than just provide a payout after death. They can also help you grow your wealth over time by accumulating cash value, which can be used during your lifetime for things like paying off debt, funding education, or even supplementing your retirement. Or you can keep the funds as a death benefit – the choice is yours.

Universal life insurance and whole life insurance both have pros and cons, especially if you're considering them for wealth-building purposes. When choosing a life insurance policy for building wealth, it's important to look beyond the premium cost. You should also consider factors like your financial goals, risk tolerance, and the policy's flexibility or guarantees.

Universal life insurance vs. whole life insurance

Before we compare the wealth-building potential of universal life insurance against whole life insurance, it's important to understand the key features of each, what they have in common, and how they differ.

Universal life insurance offers flexible premiums and death benefits, allowing adjustments as your financial situation changes.¹ In contrast, whole life insurance provides level premiums and guaranteed cash value growth, making it more predictable over the long term. Some whole life insurance policies also pay dividends, which universal life insurance doesn’t.

With universal life insurance, your cash value grows at a variable interest rate, with a minimum guaranteed rate of return. This differs from whole life insurance cash value, which grows at a fixed interest rate that never changes.² Because of that, whole life insurance is often viewed as less risky than universal life insurance.

In terms of cost, whole life insurance premiums are fixed for the policy's duration, but they could be higher than universal life insurance premiums. Universal life insurance premiums might start lower, but the costs can vary based on coverage and any adjustments you make.³

In the table below, you can see a side-by-side comparison of universal vs. whole life insurance.

Key benefits of universal life insurance

Universal life insurance can be a good option if you want to accumulate cash value. Here are some of the major advantages of universal life insurance:

• The policy provides permanent, lifetime coverage*
• It offers greater cash value growth potential than other types of life insurance.
• You can change the frequency and/or amount of your premiums using cash value.

Drawbacks of universal life insurance

Despite all the benefits of universal life insurance for building wealth, it isn't the best option for everyone. These are some drawbacks you should consider before you purchase this type of life insurance:

• Your premium could increase if your cash value underperforms.
• It requires careful management to ensure that the policy remains in force.

Key benefits of whole life insurance

Whole life insurance is one of the most common types of permanent life insurance. It offers predictable returns with limited risk, and some policies pay annual dividends. Here are some advantages of a whole life insurance policy:

• It has consistent premiums that remain level over your lifetime.
• The death benefit and cash value growth are guaranteed.
• Some policies pay dividends that can go toward purchasing additional coverage or reducing premiums.

Drawbacks of whole life insurance

If you’re interested in purchasing a whole life insurance policy, it’s a good idea to consider the drawbacks, especially the cost. These are some of the potential downsides of a whole life insurance policy:

• Typically, whole life has higher premiums compared to other types of life insurance.
• There's less flexibility to adjust premiums and death benefits if your needs change.

Which is better for building wealth: universal life or whole life?

If you want to use life insurance as part of your estate planning strategy, you might wonder whether a universal life insurance policy vs. a whole life insurance policy is a better option. Ultimately, one policy isn’t better than the other. The best life insurance policy for estate planning depends on your individual needs.

Universal life insurance lets your cash value grow with market interest rates, meaning it can rise or fall. It’s not a direct investment in the market like stocks or bonds. Instead, the cash value earns interest based on a rate set by the insurance company, which is often linked to market performance. This offers higher growth potential, but no guaranteed return. Low market rates mean lower cash value growth.

On the other hand, whole life insurance cash value grows at a fixed interest rate. The interest rate isn’t tied to market interest rates, so you’re guaranteed certain gains. The downside is that whole life insurance cash value accumulates at a slower rate than universal life insurance. With whole life insurance, you're guaranteed returns, however, expect more modest growth.

Another benefit of whole life insurance is that some policies pay dividends when the insurance company exceeds its financial expectations. The money earned through dividends can be put towards growing your cash value or withdrawn as cash to help you build wealth faster. Keep in mind, using the cash value will reduce the death benefit.

Whether you decide that universal life insurance or whole life insurance is better for your needs, both policies can help you build wealth in the following ways:

• Taking a loan against the cash value of the policy
• Putting up your life insurance policy as collateral for a loan
• Withdrawing the cash value and investing the money
• Using accelerated death benefits while you’re living (if eligible).