Whole Vs Variable Life Insurance: Understanding The Key Differences

Whole life insurance and variable life insurance are both permanent forms of coverage. The main difference between the two is the level of risk and growth opportunity. Whole life insurance offers guaranteed cash value and death benefit minimums, while variable life insurance may offer more investment options but with less guarantee on the death benefit, depending on the policy's terms.

Premium structure and guarantees

The premium structure and guarantees of whole and variable life insurance differ in several ways. Whole life insurance offers guaranteed cash value and death benefit minimums. The insurance company assumes the risks of premium investments, creating transparency in cash value guarantees. Whole life insurance also provides fixed premiums, making it more predictable and stable.

On the other hand, variable life insurance may offer more investment options but with less guarantee on the death benefit, depending on the policy's terms. Variable universal life insurance (VUL) introduces higher financial risks to policyholders, as premiums fund death benefit claims and coverage continuation is not guaranteed. VUL allows policyholders to select variable accounts for investing extra premiums and any growth accumulated through investments. These variable account returns are generated by investing directly in stocks, bonds, and mutual funds.

While whole life insurance offers a fixed, relatively low rate of interest on the cash value, similar to a savings account or money market, variable life insurance provides more flexibility in investment options. However, it is important to note that VUL policyholders never earn dividends, as they are not participating owners of the life insurance company.

Both whole and variable life insurance are forms of permanent coverage, with level premiums and a guaranteed death benefit. Neither policy can be cancelled due to changes in health. The primary difference lies in the level of guarantees and the growth opportunities and risks associated with each type of insurance.

Growth opportunities and level of risk

Whole life insurance offers a guaranteed cash value and death benefit minimums. The insurance company assumes the risk during premium investments, creating transparency in cash value guarantees. Whole life insurance policies also earn a fixed, relatively low rate of interest similar to a savings account or money market, and the death benefit is guaranteed. This offers more predictability and stability.

Variable life insurance, on the other hand, may offer more investment options but with less guarantee on the death benefit, depending on the policy's terms. Variable life insurance policies have more flexibility, giving you the option to invest the cash value in securities such as mutual funds. Variable universal life insurance (VUL) introduces higher financial risks to policyholders, as premiums fund death benefit claims, and coverage continuation is not guaranteed, even with equal or greater premiums. The potential advantage of extra VUL premiums relies on variable accounts outperforming increasing insurance costs, affecting cash value and death benefits.

Variable account returns are generated by investing directly in stocks, bonds, mutual funds, etc. VUL and IUL policyholders never earn dividends, as they are not participating owners of the life insurance company but are leasing their insurance coverage. The biggest difference between the two types of life insurance is that whole life insurance is a contract that the insurance company guarantees will perform exactly as illustrated at the time of the sale, while variable universal life insurance does not offer this guarantee.

Death benefit and cash value

Whole life insurance offers fixed premiums and a guaranteed death benefit, which makes it more stable but less flexible than variable life insurance. Whole life insurance also guarantees cash value and death benefit minimums, with the insurance company shouldering these risks during premium investments. This creates transparency in cash value guarantees, converting the base death benefit to paid-up insurance.

Variable life insurance may offer more investment options but with less guarantee on the death benefit, depending on the policy's terms. Variable universal life insurance (VUL) introduces higher financial risks to policyholders, as premiums fund death benefit claims, and coverage continuation is not guaranteed, even with equal or greater premiums. The potential advantage of extra VUL premiums relies on variable accounts outperforming increasing insurance costs, which can affect cash value and death benefits.

Both variable and whole life insurance are forms of permanent coverage. Neither policy can be cancelled due to changes in your health. Both types of life insurance also have a death benefit and accumulate cash value on a tax-deferred basis over time. The cash value of a whole life policy earns a fixed, relatively low rate of interest similar to a savings account or money market, and the death benefit is guaranteed.

Variable life insurance policies have more flexibility, giving you the option to invest that cash value in securities such as mutual funds. Variable universal life insurance is very similar to indexed universal life insurance (IUL). IUL earns an index-based crediting rate on the “extra” premiums paid for the policy as well as any cash value growth which has accumulated due to this crediting rate. VUL, on the other hand, allows the policyholder to select variable accounts with the insurance company for investing the extra premium paid as well as any growth which has accumulated through the investments. Variable account returns are generated by investing directly in stocks, bonds, mutual funds, etc.

Investment options

Whole life insurance offers guaranteed cash value and death benefit minimums, with the insurance company assuming the risk during premium investments. This creates transparency in cash value guarantees, converting the base death benefit to paid-up insurance. Whole life insurance policies also earn a fixed, relatively low rate of interest similar to a savings account or money market.

Variable life insurance, on the other hand, may offer more investment options but with less guarantee on the death benefit, depending on the policy's terms. Variable universal life insurance (VUL) introduces higher financial risks to policyholders, as premiums fund death benefit claims, and coverage continuation is not guaranteed, even with equal or greater premiums. VUL allows the policyholder to select variable accounts with the insurance company for investing the extra premium paid, as well as any growth that has accumulated through investments. Variable account returns are generated by investing directly in stocks, bonds, mutual funds, etc.

The potential advantage of extra VUL premiums relies on variable accounts outperforming increasing insurance costs, affecting cash value and death benefits. Understanding the tax implications before committing to the contract is crucial.

Flexibility

Variable life insurance offers more investment options but with less guarantee on the death benefit, depending on the policy's terms. Variable universal life insurance (VUL) is very similar to indexed universal life insurance (IUL). The difference between the two types of life insurance is that IUL earns an index-based crediting rate on the “extra” premiums paid for the policy as well as any cash value growth which has accumulated due to this crediting rate. VUL, on the other hand, allows the policyholder to select variable accounts with the insurance company for investing the extra premium paid as well as any growth which has accumulated through the investments. Variable account returns are generated by investing directly in stocks, bonds, mutual funds, etc.

Variable life insurance has more flexibility than whole life insurance, giving you the option to invest that cash value in securities such as mutual funds. Whole life insurance ensures guaranteed cash value and death benefit minimums, with the insurance company shouldering these risks during premium investments. This creates transparency in cash value guarantees, converting the base death benefit to paid-up insurance. Variable universal life (VUL) introduces higher financial risks to policyholders, as premiums fund death benefit claims, and coverage continuation is not guaranteed, even with equal or greater premiums. The potential advantage of extra VUL premiums relies on variable accounts outperforming increasing insurance costs, affecting cash value and death benefits. Understanding tax implications before committing to the contract is crucial.

Variable whole life insurance maintains fixed premiums and a guaranteed death benefit, making it more stable but less flexible. The cash value of a whole life policy earns a fixed, relatively low rate of interest similar to a savings account or money market, and the death benefit is guaranteed. Both variable life insurance and whole life insurance are forms of permanent coverage. Premiums are level and neither policy can be cancelled due to changes in your health.

Frequently asked questions