Permanent Life Insurance: Universal Life vs Whole Life

What is Permanent Life Insurance? What is the difference between Universal Life and Whole Life Insurance in Canada?

Permanent Life Insurance: Universal Life vs Whole Life Insurance Canada

Permanent Life Insurance: Universal Life vs Whole Life.

What is Permanent Life Insurance? What is the difference between Universal Life and Whole Life Insurance in Canada?

Permanent Life Insurance: Universal Life vs Whole Life Insurance Canada

Permanent life insurance provides guaranteed coverage for your family’s future financial needs. There are two types of permanent life insurance – Whole Life and Universal Life. Both of these long term contracts are designed to protect your family in the event of death and will continue to build cash value over time, but they also have some key differences.

What is Permanent Life Insurance?

Permanent life insurance is life insurance coverage that never expires, and pays a benefit upon the policyholder’s death. Many permanent life insurance policies also have a cash value component, where a portion of your premium payment goes toward cash accumulation, which grows on a tax-deferred basis. You can borrow against the cash value, but these loans taken usually accumulate interest and reduce the overall death benefit. As with all insurance types, there are some benefits and disadvantages that come with permanent life insurance.

Permanent Life Insurance Advantages and Disadvantages

Permanent Life Insurance Pros

  • Policy stays for life with level premiums
  • You can grow an investment with the policy
  • Some offer limited pay periods for premiums (you only have to pay for a set period of time, not indefinitely)

Permanent Life Insurance Cons

  • Permanent life insurance policies are more expensive than term life insurance policies
  • Inappropriate for short-term expenses (funerals expenses, mortgages, college funds, or other short term expenses)

Universal Life Insurance vs Whole Life Insurance in Canada

Universal life insurance and whole life insurance are two of the most common types of permanent life insurance products. Both offer a payout to your beneficiary upon your death, and a cash value accumulation or cash surrender value (CSV). This amount exists if you want to borrow against your policy or cancel it to redeem the CSV, which is also called “surrendering.” Note that this amount, once withdrawn, is not shielded from tax, so surrendering your policy to collect it can lead to a large chunk taken away from your insurance payout.

The two products differ the most in terms of how this cash value is accumulated and managed.

Main differences between Universal life vs Whole life insurance policies

The main differences between these two types are how much premiums cost, the investment accounts, and the tax advantages available.

  • With Universal Life, premiums can only cover the account deductions or also include investments. Investments can be made at anytime
  • Whole Life premiums stay the same throughout the entire policy
  • Universal life policyholders have complete freedom with how they choose to invest their investment account value. The account earns interest according to the market, meaning losses are possible
  • If the whole life policy is a participating policy, the policyholder can receive dividends from the insurance company if profits are made
  • Interest earned on investments in Universal life policies are tax deferred
  • Whole life policies generally don’t have any tax advantages

Universal Life Insurance in Canada

As a type of permanent life insurance, universal life insurance covers you for life and is guaranteed to pay cash to the beneficiary. Universal life insurance also incorporates a potentially high-earning investment account: part of your premiums go toward investments of your choice.

Universal Life Insurance Pros and Cons

Universal Life Insurance Pros

  • You can invest as much or as little as you want, as long as the regular deductions are covered
  • You have control over where you want to put your investments
  • Interest earned on account value is tax-deferred

Universal Life Insurance Cons

  • Tends to be more complex which can be difficult to understand
  • Investments can perform poorly, resulting in a loss
  • Investment account needs constant monitoring and regular rebalancing

Whole Life Insurance in Canada

Whereas universal life insurance provides the freedom of choice in where and how much you can invest, whole life insurance leaves the investment choice to the insurance company. There are also two ways the interest is accrued: through non-participating whole life policies, and participating whole life policies.

For non-participating (or ‘non-par’)whole life insurance policies, the life insurance company retains any interest from CSV investments. However, premiums for non-participating policies are generally lower, as they factor in these gains.

For participating (or ‘par’) whole life insurance policies, interest is distributed to policyholders (minus a fee) as a policy dividend. If investments result in a loss in a given year, no dividend will be paid, but the policyholder will not lose any CSV. While participating policies have the opportunity to make more than non-participating policies, premiums are higher to reflect this.

Whole Life Insurance Pros and Cons

Whole Life Insurance Pros

  • Premiums are cheaper later in life compared to term life insurance
  • Opportunity to build up a CSV, which can be a useful asset
  • Don’t need to actively check and rebalance CSV/investment account

Whole Life Insurance Cons

  • Premiums are expensive in early years of the policy
  • CSV in non-participating whole life insurance policies don’t earn interest
  • No control over how CSV is invested

Is Permanent Life Insurance Right For You?

What coverage is best for your family will depend on many factors, including how quickly you anticipate needing to purchase premiums, the expected cash value of each policy, and whether you choose whole life or universal life for your permanent life insurance policy. Understanding the differences will help you make decisions about the best option for you and your family. The products are designed to protect your loved ones, so it’s important to consider what they need most based on their current situation and future goals when choosing the right product for them.

Working with a life insurance advisor can help you find the right insurance policy for your needs and situation. At Protect Your Wealth, we work with and compare quotes and policies from the best life insurance companies in Canada to help you find what you’re looking for.

Contact Protect Your Wealth or call us at 1-877-654-6119 to talk to an advisor today. We’re proudly based out of Hamilton, and service clients anywhere in Ontario, including areas such as Aurora, Milton, Ancaster, Markham, and Stoney Creek.

Talk to an advisor today.

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