Whole Life vs Universal Life: How to Pick a Permanent Life Insurance Policy

Posted on October 12, 2018

According to a recent study, less than a third of Canadians report having adequate insurance coverage for serious life events, such as major illness or death. Where do you fall into that statistic?

If death and taxes are the only two universal givens in this lifetime, then it's important you make sure they're both adequately covered, right?

Navigating different life insurance terms can be confusing. With that said, it's important to understand the similarities and differences between various policies.

Let's get into what you need to know about whole life vs. universal life insurance plans.

What is Permanent Life Insurance?

Permanent life insurance refers to the overarching term for all life insurance plans that do not come with expiration dates. Essentially, permanent life insurance provides, well, permanent coverage!

There are typically two parts: the savings and/or investment portion and the insurance portion.

Policies provide lifelong protection. They all provide a guaranteed death benefit and tax-free withdrawal and loans. Furthermore, they all provide both medical and no-medical exams.

Each policy comes with its own premium (which is invested by your insurance company). Furthermore, policyholders may take policy loans by borrowing against their cash value. This cash value refers to the total savings you can access in your future.

There are currently two major players in the permanent life insurance game. They are:

  • Whole life insurance: provides guaranteed cash value accumulation and consistent premiums
  • Universal life insurance: provides more flexibility and openness in the premium payments, savings, and policy death benefits

Each type has its own pros and cons, and it's important for insurance shoppers to understand the limitations of each policy.

Understanding Whole Life Insurance

If you have a whole life insurance policy, you are covered for the duration of your life. Essentially, you will pay a fixed amount (premium) for a specified period to receive the death benefit.

This policy is kept intact no matter how long you live (whether it's age 55 or 105). You'll be provided with life insurance coverage as a savings benefit.

The insurance company will place a portion of your insurance funds in a bank account. With every payment, your total cash value will increase. These payments are tax-deferred, which provides an extra incentive for policyholders.

Because the cash is guaranteed, you can always borrow against it if needed. You can also receive dividends if you opt to participate in your insurance company's surplus. The dividends will come in the form of cash or they will be accumulated as interest within your account.

The most important tenant of whole life insurance is the long-term commitment. It can be a costly plan, so it is essential that you keep it intact for the duration of your life.

Most companies recommend buying plans as soon as you can. In fact, the younger you are, the more you can save for the long-term.

Premiums can be expensive if you're comparing them to term life insurance. If finances are tight, it's important to look at the variety of options available to you.

Understanding Universal Life Insurance

Universal life insurance provides you with the freedom to change, reduce, or increase your death benefits and pay premiums at any time and amount after the first payment has been made.

In other words, you can essentially determine the total value of your insurance coverage. Policyholders can change the frequency, amount, and type of premium payments (i.e. choosing to pay a lump sum or smaller payments). No matter what you choose, all interest grows on a tax-deferred basis.

This option can be advantageous if you come across a financial hardship. If this happens, you can always reduce or stop your payments. You can then just use your cash value to pay the remainder of the premiums.

On the flip side, universal life insurance can be pricey. It typically costs between 3-4x more than term insurance. However, it should be noted that it does cost less if you buy the policy when you are younger.

Like most insurance plans, universal life insurance becomes progressively more expensive with time. If your mortality expenses increase each year, you'll need to make sure that your policy benefits remain in good standing.

In terms of your death benefit, you can either choose between a fixed amount of benefits or an increasing death benefit equivalent to the face value of your policy in addition to a cash value account.

Understanding the Main Differences

There are several differences between both policies, and each of these may benefit you and your family's needs.

Payment Options

With whole-life insurance policies, you are paying a fixed-level premium. It won't increase or decrease. With universal life insurance, you have a variety of flexible payment options that will allow you to even skip payments if needed.

Interest Paid

For whole-life insurance, you typically receive interest on an annual basis. However, with universal policies, you will usually receive it on a monthly basis. This means there can be differences in interest amounts as the market ebbs and flows.

Dividend Payments

You will not receive dividend payments if you have a whole-life insurance policy. You will, however, have the option for these payments if you carry a universal life insurance plan.

Choosing Between Whole Life Vs. Universal Life Insurance

There's no doubt that it can be complicated and stressful to choose between different whole life vs. universal life.

With that said, you should commend yourself for choosing to give you and your family the peace of mind needed during a challenging time.

At Insurdinary, we are passionate about helping Canadians find the best and lowest insurance rates. Get a life insurance quote with us today!

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