What’s the difference between universal and whole life insurance?

You know you need to invest in life insurance. And you want a policy that covers you for your entire life, not just a set number of years. This means that you have two main choices: a whole life insurance policy or a universal life insurance policy.

The problem is that most consumers get these two types of life insurance policies confused. This isn’t surprising. Both whole life and universal life insurance provide coverage for you throughout your entire life. And both come with an investment portion, meaning that you can earn money off of both policies.

But there are important differences between the two.

In a whole life policy, you’ll receive coverage until the day you die. During the life of your policy, the insurance company behind it will invest some portion of your insurance premium into products such as bonds or mortgages. You might receive the proceeds from these investments in the form of a regular dividend. Some companies even offer a guaranteed rate of return, reducing much of the risk involved in taking out one of these policies.

Universal life works a bit differently. First, you’ll decide how much you want to pay above a minimum premium set by your insurer. The insurance company then invests these extra dollars, usually into mortgage products or bonds. The money you invest, and the returns on your investment, are then funneled into an account. You can use the money in this account to cover your regular premiums or you can allow it to grow over time.

When you die, the money in this account is handled in one of two ways. In one type of universal policy, the money is simply used to cover a portion of the face value of the account, and your beneficiary only receives this face-value amount when you die. In another type, the beneficiary of your account receives not only the face value of it but also the money in your investment account. This second type of policy often requires higher premiums as you age.