What are some of the pros and cons of whole life insurance vs. universal life insurance? How does one decide which type of policy to purchase? Read on to learn some of the basics of both types of coverage.

Whole life insurance and universal life insurance are both permanent types of life coverage instruments.

There are four basic parts to both universal and whole life. The mortality cost, which shows what part of your deposit covers the death benefit of the policy. The administration charges which include the premium taxes and costs incurred by the insurance company to manage your policy.

The savings and investment portion is the amount of money you have left to after the mortality costs and administration charges. This money is sometimes called the cash value, fund value, or cash surrender value.

The fourth part of a whole or universal insurance policy is called the return on the savings. This is the interest rate that is credited to the cash value of your policy every year.

A whole life policy is a permanent policy where the premiums are set at a fixed amount and never change until you have paid funded the policy in full. Also, the amount of the death benefit will not increase or decrease over the life of the policy.

One of the drawbacks to a whole life policy is that the insurance company does not have to disclose the mortality cost or the administrative costs to you. The savings or investment portion of a whole life insurance policy is determined by the excess interest, savings in the mortality cost, the operating expenses to maintain the policy, and you are at the mercy of the Board of Directors of the company who decide what they are willing to pay.

You also can't chose where the money in your cash value account is invested, and the insurance company may not disclose the rate of return to you either.

A universal life insurance policy has flexible premiums, an adjustable death benefit, and the cash value of a universal life insurance policy is interest sensitive, meaning if interest rates increase so will the value of your universal life insurance policy.

In addition, with a universal life insurance policy, the insurance company will disclose both the mortality costs and the administrative costs to you.

The premium levels and the death benefits can be adjusted by you if you choose to do so. With whole life both the premiums and death benefit are set in stone at the time you buy the policy, which could lead to higher returns.

With a universal life policy you can put any excess money into the policy which will increase the cash value of the policy immediately.

In conclusion, if you are more comfortable with a fixed premium and death benefits, then a whole life policy may be your best choice. However, if you want more flexibility and have the time to monitor your policy, then a universal life policy may be your best option.

Whichever type you may choose, always compare life insurance companies, their premiums, rate of return, and customer service. Don't feel pressured to buy a product that you feel may not meet your needs or wants. Shop around for an agent you can feel comfortable with and who is sensitive to your individual situation and life goals.

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