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If you’re shopping for life insurance, you’re probably already confused by the range of options available and maybe the terminology too! But figuring out which plan is right for you starts with understanding the basics, so you’re in the right place!
In this article, we’ll talk about two types of life insurance: whole life and universal life, focusing on their similarities and differences.
What are Universal and Whole Life Plans?
Both universal and whole life plans are types of permanent life insurance plans as opposed to term life plans. Universal and whole-life plans have the following things in common:
- They never need to be renewed: if you’re paying your premiums, coverage lasts your entire life, paying out when you pass away. In contrast, term life policies only last a set number of years.
- They usually have two portions: an insurance portion and a savings or investment portion.
- Depending on their accumulated value, you can recover the cash value of these policies if you cancel them. You can also borrow against their cash value.
- Gains inside the policy, whether those come from investments within the policy or dividends, are tax-sheltered, so both types of policies allow you to accumulate wealth tax-free.
How Do Universal Plans Differ from Whole Life?
Despite their similarities, the differences between universal and whole life plans are enough to make each type of plan ideal for a different type of policyholders.
Overall, whole life insurance offers more stability and consistency, making it more expensive. Universal life insurance is more flexible and tends to be less costly.
Differences between whole life insurance and universal life insurance plans fall into four categories:
1. Premiums
- Whole life plans have fixed premiums that never change.
- Payments for universal life plans are flexible. You decide how much to contribute and how often to make contributions. The only limitation is that your contributions should cover the cost of the insurance itself; otherwise, your provider will use the money in the investment part of your account to pay for your insurance. This will continue until the account is completely depleted, at which point your coverage will lapse.
2. Face Value (the amount the policy pays out)
- The face value of whole life policies doesn’t change, although you can always purchase additional insurance if you need it.
- You can adjust the face value of universal life policies without cancelling and repurchasing coverage. This can be useful when your needs and responsibilities change. If you lower the face value, your minimum contribution will also be lower.
3. Cash Value
- The cash value of your whole life policy increases steadily over time because your provider puts a portion of each premium payment into a savings or investment account. Because of this, you can borrow against the cash value of your policy. You can also cancel your policy and get the cash value. While this would leave you without coverage, it can be helpful in the event of an emergency or an unexpected cash outlay.
- Universal life policies accumulate cash value if you contribute more than the minimum (i.e., the cost of the insurance itself). You can withdraw from your cash balance or borrow from it, with the caveat that fully depleting the account means you won’t have coverage. Like whole life insurance policies, you can use the cash value of your universal life policy as collateral for a loan.
4. Interest and Dividends
- When you buy a whole life insurance policy, your contract will specify a minimum interest rate for the cash portion of your account. Your policy may also include dividends, which you can withdraw as cash or reinvest in the policy.
- Universal life insurance policies don’t offer a guaranteed return because returns are based on the performance of the underlying investments that your provider makes.
Which is Better: Whole Life Insurance, or Universal Life Insurance?
This depends on several factors, including your age and the age of your dependents, risk tolerance, financial needs now and in the future, and how much control you want over your investments. Consulting with a financial planner or life insurance advisor is a good strategy if you’re unsure which option is right for you.
Canada Protection Plan offers a wide range of life insurance products to suit your family’s needs throughout your lifespan. Try our insurance calculator for a quick estimate of how much insurance is optimal for you and our Quick Quote tool to get an idea of what your premiums might be. If you have any questions about our products, feel free to contact us. We’re ready to help you set your family up for a secure, worry-free future!
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