NO, but they are similar in the fact that they can (according to the insurance company)build up cash value over time from your premium payments. Whole life insurance cost.
I will attempt to make this simple:
The flexibility that a universal life policy provides is a key differentiator over whole life. As a result, universal life insurance premiums are typically lower during periods of high interest rates than whole life insurance premiums, often for the same amount of coverage.
Another key difference would be how the interest is paid. While the interest paid on universal life insurance is often adjusted monthly, interest on a whole life insurance policy is normally adjusted annually. This could mean that during periods of rising interest rates, universal life insurance policy holders may see their cash values increase at a rapid rate compared to those in whole life insurance policies.
Some people may prefer the set death benefit, level premiums, and the potential for growth of a whole life policy. However, for those who would prefer to have more flexibility and options when it comes to their permanent life insurance, then universal life might be the better choice.
BOTH of these products should be avoided in my opinion with the exception being if age prohibits an individual from buying a term product.
Universal life insurance and whole life insurance have similar features at a high level but in fact are very different. Let’s address what’s common between them then what’s different.
What’s common between universal life and whole life insurance?
Both policy types allow you to buy permanent life insurance coverage (not term) with varying abilities to build policy value in the form of cash value. You can add features like waiver of premium (premiums waived if you meet the disability definition for the rider), accelerated benefits for terminal illnesses, LTC-linked riders, and the ability to tie cash value to an index (indexed UL and whole life with index options, not including variable UL).
What’s different between universal life and whole life insurance?
While both of these policies provide permanent coverage and the potential for cash value accumulation, they have very different structures “under the hood.”
Whole life insurance guarantees a premium, death benefit, and cash value accumulation over the entire contract. If you pay your premiums as required every year, then your cash value will not go down. They will only increase over time, as long as you pay your premiums.
Universal life insurance has a variable chasis which allows you to choose alternative premium strategies like underfunding your premiums or not paying for a unit of time. Therefore, you can get behind in funding for your universal life insurance contract if your policy underperforms compared to your expectations or if you habitually underfund the contract.
Universal life insurance is a contract which states that you have death benefit as long as the cost of insurance is paid. The insurance cost increases every year like yearly renewable term ($500 one year, then $520 the next year, then $550 the year after, etc.).
Your premium is higher in the earlier years than the cost of insurance and the surplus is held as cash value and credited with an interest rate specific to your contract and carrier.
The play here is that in later years, your cash value (surplus premiums plus compounded interest) is sufficient to fund the premiums in later years when the insurance cost is higher than the premium you are paying. Your cash value will go up in the early years, slow in growth as some of the growth is allocated to insurance cost, then the cash value may start to decrease in the later years, depending on how the math works out with your specific policy design. A well-funded universal life contract may not see a decrease in cash value ever, or it may start to decrease and near zero early in the contract. It just depends. The key is to fund your contract in a way that fits your financial situation and that sets reasonable expectations for cash value growth over time.
If the cash value hits zero and you do not pay enough in that year to meet the cost of insurance, then your coverage may lapse and be cancelled if you don’t meet the premium requirement.
Note that a guarantee rider can be added which basically says “if you pay this premium ever year, then your policy will not lapse even if the cash value hits zero.” A GUL or Guaranteed Universal Life contract is essentially a permanent term insurance product - it provides pure risk management value as death benefit with no cash value available to you.
Whole life premiums are higher than universal life premiums, all things being equal, because universal life shifts some risk to the insured. This is not a bad thing, it is just a fact for the owner to consider.
Fixed term insurance
Small note about term insurance
Just so we address it. Term insurance is a very cost effective risk management tool if you are unsure if permanent insurance (whole or universal life) is right for you. Many people are in fact well served with term insurance! Don’t let yourself be hard sold by an agent on a permanent insurance plan that focuses on the insurance and not on you and your own unique situation.
Many businesses and estate planners use universal life insurance for planning because of the greater range in features and policy design flexibility.
Individuals use both whole life and universal life to fit their specific needs and the policy should match up with what the client is looking for, not the other way around.