Universal Life vs. Whole Life: How Risk Factors

"Risk tolerance" often relates to investments, but it can also apply to everyday life. Consider the decision to rent or buy a home as an example. Buying a home involves more risk because of costs and market changes, while renting offers more flexibility. Similarly, in insurance, your comfort with financial uncertainty should guide your policy choice.

Let's explore how a thoughtful understanding of your risk tolerance can help you choose between the two major types of permanent life insurance — whole life and universal life.

How risk tolerance affects insurance choices

Knowing how much risk you're comfortable with can help you to not only pick the right insurance but also decide on premiums (the amount you pay each month), coverage limits (how much your insurance will cover), and the type of insurance you might need.

For example, people who are okay with taking more risks might choose insurance plans with less coverage to save on monthly premiums. They prefer to pay less each month but might have to pay more out-of-pocket if something happens.

Imagine two individuals shopping for permanent life insurance: one is a small business owner who budgets carefully, avoids financial uncertainty, and feels anxious about market fluctuations. The other works in sales, where earnings are unpredictable and economic difficulties are common. The salesperson is more likely to take the policy type that allows for higher risks for stronger long-term gains, while the risk-averse business owner might opt for the policy choice with a smaller but sturdy income stream.

Considering only their different risk profiles, a universal life policy, which offers growth and flexibility, may be more suited for the salesperson, while the whole life policy, which provides certainty and predictability, may be more appropriate for the business owner.

Comparing universal life vs. whole life insurance

Both policies offer death benefits, lifetime coverage and cash value growth, but take different approaches to risk and reward. Using the chart below, let's break down the differences to further guide your selection process.

Besides death benefits, which are adjustable, universal life insurance provides flexible premium payments. You can adjust premiums as your situation changes. For example, a couple might lower premiums while saving for a home, then increase them later. It also allows cash value growth, which can be taken out as a loan or withdrawal.

The greatest value of whole life insurance is its fixed death benefits. But the cash value component that can be accessed in emergencies is a very important feature. It guarantees benefits that aren't affected by market changes. Though it requires higher premiums, whole life insurance appeals to those who prefer predictability.

With universal life insurance, you might see your cash value grow faster than with other policies. If you don't mind trading a bit of uncertainty for the possibility of better long-term results, universal life could be a great fit. Whole life insurance, however, appeals to risk-averse individuals seeking predictability and guaranteed protection. For many policyholders, the higher cost of whole life is justified by the comfort of knowing exactly what they'll pay and what their beneficiaries will receive, regardless of economic conditions or market fluctuations.

Cash value growth considerations

Choosing between higher returns with universal life or guaranteed growth with whole life isn't about which is better, but what aligns with your comfort and goals.

Universal life insurance is linked to market performance. Your money grows in good markets but may stall in poor ones. This approach suits those who accept short-term volatility for long-term gains. It prioritizes potential growth over complete safety.

With whole life insurance, which also comes in various forms, your cash value increases consistently, no matter what the market does. Predictability is especially helpful in uncertain economic times.

Next steps to evaluating your risk profile

Risk is a natural part of life, especially with finances. With life insurance, your choice should reflect your personal risk tolerance and values. Ask yourself how you react when investments drop temporarily or how important guaranteed outcomes are to your overall wellbeing and stress levels.

Consider which matters more: knowing exactly what your policy will be worth in 20 years, or having the opportunity for potentially higher returns with some uncertainty. And, remember that your comfort level with risk and your personal situation can shift, so review your insurance regularly to verify it still meets your requirements.

Speak to a financial representative from Mutual of Omaha about how life insurance can be tailored to suit you and your family's unique needs. They can explain how different policies might perform under various economic scenarios, helping you find the permanent life insurance solution that fits your risk profile and financial objectives.

To determine how much life insurance coverage might work for you or your family, also consider using this life insurance calculator. This comparison chart is also helpful. It briefly outlines various life insurance policies and their main features.